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Barron’s Interview and Video with Roubini: “Yes, That’s $2 Trillion of Debt-Related Losses”

Author: Nouriel Roubini  ·   ·   › Share This Print

Barron’s magazine has published this week an interview with me available both in the print and online edition. Barron’s online has also an additional video interview with me where I elaborate on some of the points in the print interview.

Here is below the text of the interview in the print edition of Barron’s (followed by some additional commentary by me on the U.S. and global economy and the financial crisis):

Interview

Yes, That’s $2 Trillion of Debt-Related Losses

Nouriel Roubini, Economist and Professor, New York University

By ROBIN GOLDWYN BLUMENTHAL

LIKE THE EXHORTATIONS OF JEREMIAH TO THE NATION OF Israel before the first temple’s destruction, the warnings of economist Nouriel Roubini fell on deaf ears. For the past two years Roubini, a professor at New York University, has cautioned about a huge housing bubble whose bursting would lead to a 20% drop in home prices; a collapse in subprime mortgages; a severe banking crisis and credit crunch; the near-failure of Fannie Mae and Freddie Mac , and a U.S. recession of a magnitude not seen since the Great Depression. So far, this latter-day prophet of doom has been on the mark, though time will tell about the recession part.

A Turkish native who grew up in Italy, Roubini trained at Harvard and later advised the Clinton White House, after his blog on the Asian financial crisis attracted the attention of Washington’s economic and political elite. Roubini still publishes the blog — the RGE Monitor — and teaches economics at NYU’s Stern School of Business. We caught up with him recently at his offices in lower Manhattan, and continued the conversation at Barron’s. For his latest predictions, please read on.

 
 

Barron’s: Unfortunately for the rest of us, you have a pretty good track record. How much more misery lies ahead?

Roubini: We are in the second inning of a severe, protracted recession, which started in the first quarter of this year and is going to last at least 18 months, through the middle of next year. A systemic banking crisis will go on for awhile, with hundreds of banks going belly up.

Which banks, specifically, will fail?

I don’t want to name names, but many, given the housing bust, will become insolvent. Their losses are mounting because they have written down only their subprime loans so far. They haven’t started writing down most of their consumer-credit losses, and reserves for losses are much less than they should have been. The banks are playing all sorts of accounting gimmicks not to recognize them. There are hundreds of [billions] of dollars outstanding in home-equity loans that eventually could be worth zero, too.

So far, we have seen no recession in the technical sense: two consecutive quarters of negative growth in real GDP. Why not?

The definition of a recession isn’t only two consecutive quarters of negative growth. The NBER (National Bureau of Economic Research) puts a lot of emphasis on things like employment, and employment has already fallen for seven months in a row. It also emphasizes income and retail and wholesale sales. Many of these things are declining.

Maybe the recession started in January; if you look at the data on gross domestic product on a monthly basis between February and April, GDP was falling. Saying this is not a recession is just a joke. Maybe instead of a ‘U’ recession and recovery, it will be a ‘W,’ with a rebound in the second quarter. But by the third quarter, the effect of the government’s tax rebates is totally gone, because other forces on the consumer are more persistent and negative.

Which forces, for instance?

The U.S. consumer is shopped out and saving less. Debt to disposable income has risen to 140% from 100% in 2000. Hit by falling home prices, the consumer no longer can use his house as an ATM machine. The stock market is falling and (issuance of) home-equity loans (has) collapsed. We have a credit crunch in mortgages, and gas is around $4 a gallon. Everyone says, ‘yeah, that’s true, but as long as there is job generation there is going to be income generation and people are going to spend.’ But for seven months in a row, employment in the private sector has fallen.

The most worrisome thing is that in spite of the rebates, retail sales in June were up only 0.1%. In real terms, they were down. If people were not spending their rebate checks in June, what will happen when there are no more checks?

Good question. How do you think Federal Reserve Chairman Ben Bernanke has handled the crisis so far?

The Fed’s performance has been poor. More than a year ago the Fed said the housing slump would end, but it hasn’t. They kept repeating this was a subprime-debt problem only, whereas the problems of excessive credit involve subprime, near-prime, prime, commercial real estate, credit cards, auto loans, student loans, home-equity loans, leveraged loans, muni bonds, corporate loans — you name it.

The Fed’s other mistake was to believe the collapse of the housing market would have no effect on the rest of the economy, when housing accounted for a third of all job creation in the past few years. When the proverbial stuff started to hit the fan last summer, the Fed went into aggressive-easing mode. But it has always been kind of catching up.

What should Bernanke have done a year ago, or even prior to that?

The damage was done earlier, beginning when the Greenspan Fed lowered interest rates in 2001 after the bust of the technology bubble, and kept them too low for too long. They kept cutting the federal funds rate all the way to 1% through 2004, and then raised it gradually instead of quickly. This fed the credit and housing bubble.

Also, the Fed and other regulators took a reckless approach to regulating the financial sector. It was the laissez-faire approach of the Bush administration, and (tantamount to) self-regulation, which really means no regulation and a lack of market discipline. The banks’ and brokers’ risk-management models didn’t make sense because no one listens to the risk managers in good times. As Chuck Prince (the deposed CEO of Citigroup) said, ‘when the music plays you have to dance.’

Now the regulators are attempting to make up for lost time. What do you think of their efforts?

The paradox is they’re going to the opposite pole. They are overregulating, bailing out troubled participants and intervening in every market. The Securities and Exchange Commission has accused others of trying to manipulate stocks, but the government itself is now the manipulator. The regulators should investigate themselves for bailing out Fannie Mae (FNM) and Freddie Mac (FRE), the creditors of Bear Stearns and the financial system with new lending facilities. They have swapped U.S. Treasury bonds fo
r toxic securities. It is privatizing the gains and profits, and socializing the losses, as usual. This is socialism for Wall Street and the rich.

So the government should have let Bear Stearns fail, not to mention Fannie and Freddie?

If you let Bear Stearns fail you can have a run on the entire banking system. But there are ways to manage Bear or Fannie and Freddie in a fairer way. If public money is to be put at stake, first all the shareholders of these companies have to be wiped out. Management has to be wiped out, and the creditors of Bear should have taken a hit. Why did the Fed buy $29 billion of the most toxic securities, and essentially bail out JPMorgan Chase (JPM), which bought Bear Stearns?

Because JPMorgan was a counter-party?

Exactly. The government bailed out everyone. Even the unsecured creditors of Fannie and Freddie should have taken a hit. Sometimes it is necessary to use public money to rescue institutions, but you do it in a way in which you’re not bailing out those who made the mistakes. In each one of these episodes the government bailed out the shareholders, the bondholders and to some degree, management.

At what point does the government run out of money to lend to troubled banks?

Many public institutions are themselves going bankrupt. The FDIC (Federal Deposit Insurance Corporation) has only $53 billion of funds, and has already committed almost 15% of it to bail out depositors of IndyMac. The FDIC’s deposit-insurance premiums weren’t high enough, and now it is asking Congress to raise them. Plus, the agency claims only [ninety] institutions are on its watch list. IndyMac wasn’t on the watch list until June, the month before it collapsed. Studies done by experts in banking suggest that at least 8% of U.S. banks are in big trouble. Eight percent of the roughly 8,500 that the FDIC essentially is insuring equals about 700 banks. Another 8% to 16% also are shaky, so some 700 potentially are going bust and another 700 eventually could join them. Yet the FDIC is watching only [ninety] institutions. It’s a joke.

What recourse will the taxpayer have?

The taxpayer’s bill is going to be huge. I estimate this financial crisis will lead to credit losses of at least $1 trillion and most likely closer to $2 trillion. When I made this analysis in February everybody thought I was a lunatic. But a few weeks later the International Monetary Fund came out with an estimate of $945 billion, Goldman Sachs (GS) estimated $1.1 trillion and UBS (UBS) $1 trillion. Hedge-fund manager John Paulson recently estimated the losses would be $1.3 trillion, and late last month Bridgewater Associates came up with an estimate of $1.6 trillion. So, at this point $1 trillion isn’t a ceiling, it’s a floor. And the banks, as I’ve said, have written down only about $300 billion of subprime debt.

How long will it take for the collapse in the banking sector to play out?

It is happening in real time. Many smaller banks are going bust already. More than 200 subprime-mortgage lenders have gone bust in the past year alone. And many community banks will go bankrupt. Community banks usually finance everything: the homes, the stores, the downtown, the commercial real estate, the shopping center. If you are in a town or a municipality where there is a housing bust, the bank is gone. Of three dozen or so medium-sized regional banks, a good third are in distress. That includes the Wachovias and Washington Mutuals of the world. Half of this group might go bankrupt. Even some of the majors could end up technically insolvent, though they might be deemed too big to fail.

Take Citigroup. In 1991 there was a small real-estate bust, though the quarterly fall in home prices was only 4%, based on the S&P/Case-Shiller indices. Citi was effectively bankrupt and signed a memorandum of understanding with the Fed that allowed the government to give the bank regulatory forbearance. Citi was allowed to ride it out and try to recapitalize in a few years, and thereby avoid bankruptcy protection. This time around the S&P/Case-Shiller indices indicate home prices already have fallen 18%. The decline could be as much as 30%, because the excess supply is huge.

Nouriel, have you always been so negative about everything?

No. I’m actually a pretty mainstream economist. I was trained first in Italy and then in the U.S. and earned my Ph.D. at Harvard. My interests are in international market economics and international finance, and I’m not a ‘perma-bear’ on the stock market nor an eternal pessimist.

Leaving aside the fact that we are going to have a pretty nasty recession and international crisis, the global economy is going to grow at a sustained rate once this downturn is over. There are significant financial and economic problems in the U.S., and that’s why I’m bearish about the U.S. But the emergence of China and India and other powers is going to shift global economics and politics radically, and the world is going to be more balanced in the future, rather than relying on one engine, which has been the U.S. There are big issues ahead: How do you integrate the 2.2 billion Chinese and Indians into the global economy? There will be transitional costs and the displacement of workers, both blue-collar and white, in the advanced economies. But I’m quite bullish about the state of the global economy, and I’m positive about the medium and long term.

That’s a relief. Thank you.

And here are below the comments that Alan Abelson – Barron’s columnist and one of the most senior and well respected commentators on Wall Street – made a few weeks ago (in his Barron’s column – aptly titled “Dead Stocks Rallying”) following my analysis of the extent of the economic and financial crisis that the U.S. and the world economy would experience:

WHY WE’RE STILL BEARISH WAS SPELLED out starkly in a dispatch we received last week from Nouriel Roubini. Nouriel is a professor of economics at NYU Stern School of Business (but don’t hold that against him) and runs an economic advisory firm called RGE Monitor that casts a knowing and clear eye on the global financial and economic scene. We think he’s top-notch (which means we agree with him, a lot of the time).

The nub of his argument is that we’re suffering the worst financial crisis since the Great Depression, and he proceeds to give chilling chapter and verse. He predicts that hundreds of small banks loaded with real estate will go bust and dozens of large regional and national banks will also find themselves in deep do-do.

He reckons that, in a few years, there’ll be no major independent broker-dealers left: They’ll either pack it in or merge, victims of excessive leverage and a badly flawed and discredited business model.

The Federal Deposit Insurance Corp., after it gets through picking up the pieces of IndyMac, will sooner or later have to get a capital transfusion, Nouriel asserts, because its insurance premiums won’t cover the tab of rescuing all the troubled ban
ks. He foresees credit losses ultimately reaching at least $1 trillion and anticipates a heap of woe for credit purveyors across the board.

The poor consumer, he contends, is shopped out and being hammered by falling home prices, falling equity prices, falling jobs and incomes, rising inflation. The recession he anticipates will last 12 to 18 months. And the rest of the world won’t escape: He looks for hard landings for 12 major economies. As for the stock market, he hazards that there’s plenty of room left on the downside. In fact, he feels the bear market won’t end until equities are down a full 40% from their peaks.

We must say this vision is a mite too apocalyptic even for us. But Nouriel is not a professional fear-monger out to make a splash with end-of-the-world prognostications He’s a sound guy with a solid record and an impressive résumé. We obviously believe his views are worth pondering, even if they ruin your appetite.

Those views of mine – that Abelson was referring to – were in a blog of mine that I wrote in mid-July that summarized a number of my recent writings and analyses. Here is below the summary of those views…:

This will turn out to be the worst financial crisis since the Great Depression and the worst US recession in decades:

Filed under: Uncategorized

206 Responses to “Barron’s Interview and Video with Roubini: “Yes, That’s $2 Trillion of Debt-Related Losses””

Anonymous • August 2nd, 2008 at 2:26 pm

To the point as usual…Thanks NR, for another step closer to bringing it to the masses.- Boo

Conrad Skinner • August 2nd, 2008 at 2:48 pm

The inequity of taxpayers obligation to pay their debts AND provide secondary tax support to banks – that is – privatization of profits / public burden of risk is taxation without representation. Clear eyed and brave political leadership will remedy this injustice which was a proximate cause of the American Revolution.

Mark Mentges • August 2nd, 2008 at 3:25 pm

I have been reading NR’s predictions here and elsewhere for almost two years, and so far almost all have been correct. As for the recession, it seems a bi-furcated one at this point – perhaps 80% of the public are in recession (stagnent wages, rising costs, foreclosures, falling home prices, etc.) but the 20% who are well integrated into the world economy (Google, Microsoft employees, etc.) are doing very well, and still spending. The problem is when you average these two together, it shows the "average" economic activity, not the recession of the masses. Like a town of 10 people – 9 earn $10,000 and one earns $1,000,000, so the "average" salary is $190,000!!!

Guest • August 2nd, 2008 at 3:26 pm

CNBC’s own flip-floppin’ Jim "Grasso" Cramer will need a legal team bigger than OJ’s before this bear market comes to an end…and you can throw in CNBC-TV and more importantly, deep pocketed parent company General Electric (GE) as well…especially in an evolving hostile bear market environment when "Wall Street TV" is taking center stage as the main object of public disgorgement. IMHO

Guest • August 2nd, 2008 at 3:48 pm

"Leaving aside the fact that we are going to have a pretty nasty recession and international crisis, the global economy is going to grow at a sustained rate once this downturn is over."@ RoubiniMy position is similar; the lesson to be learnt is that "The fundamentals are NOT sound" and need to be replaced with fundamentals that are sound and equate to reality in terms of physics; not imaginatory mathematics and superstition.The growth period for the whole World at the other side of this chaotic mess will be beyond imagination and will lead us all to a new epoch in technological developments and application. But firstly the lessons of today must be learnt; there can be no more "us and them" and no more ruling "elite" – schoolboy fraternities and arrogance. Physics and philosophy need to be the foundation of this new magnificent era that is rearing its glorious head.Therefore as I have stated often, this chaotic period of ‘adjustment’ is a "leadership" crisis; nothing else; a crisis of moral hazard; the lessons are visible to be observed; learn the lesson.As Ryskamp said; ‘to be civilized is to be housed’ or words to that effect one must ask: is this such a big deal? is this asking too much? is this not possible? and then move. The structure of civilization should never be threatened by the organizations of growth.Where, the human spirit should be allowed to soar throughout the Universe, without constraint, as long as the cost of failure does not impact the structure of civilization from which it has be launched.Freedom; which once made America so great; ;learn the lesson grasshoppers.Ho humPeterJB

Guest • August 2nd, 2008 at 6:27 pm

"How do you integrate the 2.2 billion Chinese and Indians into the global economy? There will be transitional costs and the displacement of workers, both blue-collar and white, in the advanced economies. But I’m quite bullish about the state of the global economy, and I’m positive about the medium and long term."Ummmm, I can see post recession/depression II Americans just opening their arms to the new crop of foreign workers from India and China. Especially, baby boomers who are forced to continue working after being bilked by the Feral Reserve and Govt.

aleister perdurabo • August 2nd, 2008 at 6:44 pm

Does anyone on this blog have a good source for information on the exposure of Pension Plans to this looming debacle. The problems at GM, Chrysler and Ford would seem to bode poorly for the prospects of their pensioners. Might this meltdown wipe out the Pension and Insurance funds?

Guest • August 2nd, 2008 at 7:40 pm

"Does anyone on this blog have a good source for information on the exposure of Pension Plans to this looming debacle. @ aleister perdurabo on 2008-08-02 18:44:53It may interest you that both Volker and Greenspan publically suggested, way back, when none of this was foreseen, that the funds for the Baby Boomers were not adequate or at least ‘fragile’. I think that you can extrapolate from there.Ho humPeterJB

SuperSubjugation • August 2nd, 2008 at 8:05 pm

Natural bounds on the powers of government?–they know none, short of the general uprising of the masses or imminent demise. All gov’t arises in hopes of achieving an Utopia but end in the overthrow of a police state and archipeligo of concentrated prisons. The USA has ripened in its iniquity. It has shown all the tendencies of evil prognosticated in all religious literature. It has become a law unto itself–full of hypocracy, vagary, caprice and torture. It must be remade within, or suffer its fall as its governed seize ultimate power once again. But the voyage between will be borne with blood. The darkness will weigh down even the mightiest souls.

AfA • August 2nd, 2008 at 8:24 pm

"That’s a relief. Thank you."What is that? I think Barron’s confuses optimism and illusion. Why does the story needs to end happily for the Americans? It ain’t a Hollywood movie.If things are bad, they are bad, need to learn how to live with it and if we want to make things less worse or ulimately better, we need to move our a$$es.Americans will have to work twice as much and be paid mimimum wage, BUT, but … they can always watch American I-doll with English subtitles.Ooof, thank God, what a relief!

WAWAWA • August 2nd, 2008 at 10:26 pm

Because JPMorgan was a counter-party?What does "counter-party" mean? I do not get the point here, can someone explain this. Thanks

kilgores • August 2nd, 2008 at 10:49 pm

@ SuperSubjugation on 2008-08-02 20:05:09Since you’ve re-posted this very important comment that you already posted to the immediately preceding thread, I’ll just repeat my own response, with a few minor edits:"Human sacrifice, dogs and cats living together… mass hysteria!"Ripened in its iniquity? Please! Enough with the apocalyptic predictions already! These pronouncements about the end of the United States sound ridiculous because they are. This judgment is not directed at your comment alone, but to all similar chaotic visions of the future posted to this blog. Every time this country experiences an economic downturn, all sorts of rash pronouncements begin to be bandied about from various quarters. It happened in the 1930s ("It’s the end of capitalism!") and in the 1970s and in 1987 and in the early 1990s and so on. Astoundingly, the United States political and economic system has managed to survive. It will survive this current crisis, too. The Roman Empire lasted a pretty damn long time before it met its demise, and the United States is in no danger of imminent collapse and will go on a very long time yet. All these charges about the United States as an evil "police state" amount to nothing more than kooky talk. If this were a real police state you bloody well wouldn’t be in a posture to spew such boneheaded vitriol against those in power. Sure, there have been horrific abuses of trust by the government, particularly during the term of this current presidential administration, but these can and are being corrected. In the meantime, all this sort of mindless self-indulgent ranting against the government may be gratifying, however, it is certainly not constructive, and comes down to little more than publicly indulging in a form of mental masturbation. We have a lot of problems in this country, and comments such as yours contribute little or nothing to explaining or resolving them.SWK

Anonymous • August 2nd, 2008 at 11:46 pm

Dr. Roubini:you had earlier predicted US home prices could fall as much as 40%. Now you have revised the number to 30%.What prompted you to change this?

Andyh • August 2nd, 2008 at 11:52 pm

I am afraid that those thinking the global economy is going to rebound sharply around 2010 (and that includes the good Professor) need to get their heads around Peakoil. Sure the near-global recession that is almost on us will knock demand back a tad, but the amount of oil available for export (which will ultimately set the global price) is stagnant if not falling (see the oildrum for details of the exportland model). By 2010 the problem will be that much more severe.

Little Saver • August 3rd, 2008 at 1:45 am

AfA on 2008-08-02 20:24:14: Americans will have to work twice as much and be paid mimimum wage. Perhaps there’s a much simpler solution: Americans have to spend twice as less, especially on non-utile consumer goods, fed up to them by an out-of-control-industry that’s only interested in $$. Instead of spending so much energy in developing, manufacturing and selling gas-destroying, air-polluting, $$ yielding hummers like in the past, focus could be redirected towards developing energy and environment friendlier means of transport for example. A world with 6 billion hummers is a disaster, a world with more efficient transport systems could mean progress. A problem of the current system is the priority of $$ maximalization over the priority of utility maximalization. Adding a utility bias to investment incentives, rather than the leading-to-nowhere, destructive supremacy of $$ chasing may spare the average citizen the prospect of working twice as hard for minimum wage pay. Why would be doomed to repeat past errors, only to further enrich the Cheneys of this world?

Beng • August 3rd, 2008 at 2:47 am

Dear Nouriel,Thanks you a million for the service you have done to the world at large for the insightful and honest analysis of the state of the financial system. Because of your courageous stand to speak the truth, as opposed to the camouflage of governmental representatives and the friends of the banks, the small people of the world (like myself) are able to benefit from this insight and to prepare ourself from the toxic waste fallout of this crisis. Please continue to be our beacon of truth!

Flanders • August 3rd, 2008 at 5:38 am

"Watch this to the end and then tank me."IMPLOSION OF THE CDS BUBBLE.This implosion has been predicted by:1) Marc Faber in March 08;2) LEAP2020 in January 08.Wait and see.

Guest • August 3rd, 2008 at 6:43 am

If a deflationary event in asset prices is occuring than short term t bills or equivelent are the best place to be. Cash investments are now worth 20 more% if priced in stocks. Cash is becoming more valuable every day.

Alessandro • August 3rd, 2008 at 8:29 am

@AfA"I think it is an improvement of Fisher’s debt-deflation theory"I agree.The main point in Shostak’s article is the difference between money-equivalent debt (demand deposits at banks) and any debt with a maturity date. The expansion and liquidation of money-equivalent debt is respectively inflationary and deflationary, while the expansion or liquidation of any other kind of debt doesn’t affect the money supply, independently of the "liquidity" of the debt instrument.An unsustainable expansion of (non-money-equivalent) debt burned to non productive uses is bad because creditors will suffer enormous losses, but it is not deflationary by itself. Deflation comes from the fact that banks themselves have speculated into unproductive activities and the losses are eating into their reserves."Although I agree with you that institutionalizing savings is a bad thing for the capital allocation decision, saving is a requirement to investment. As argued by Mish sometime the inflationary (and by extension the bad allocation of capital especially from ROTW to the US may be primarily driven by accumulation of reserves by China et al to keep stable currency against the dollar rather than a saving glut)."The whole dollar-peg/reserves mess is a different form of forced savings. The central banks effectively seize the savings of their people by printing and exchange the newly printed yuan for dollars and buy US IOUs. I agree it is no a savings glut, it is looting. And since people have no choice whether to save or not and how to allocate the savings, credit mis-allocation can happen on a massive scale.@OuterBeltway"Never a dull moment around here, right?"LOL! Right.

AfA • August 3rd, 2008 at 11:01 am

@ Little Saver:"Americans have to spend twice as less, especially on non-utile consumer goods"I completely agree with you. The remark that "Americans will have to work twice as much and be paid minimum wage [as disposable income]" was not a solution, I was just making the point that come some time, they will work most of their time only to honor accumulated debt (not necessarily direcly taken by them) either via higher taxes or via higher interest rates on their own outstanding debt.

kilgores • August 3rd, 2008 at 11:02 am

Who needs Smoot-Hawley when the market implicitly corrects trade imbalances? According to CIBC World Markets, recent increases in shipping costs are equivalent to a 9% tariff on trade:http://research.cibcwm.com/economic_public/download/smay08.pdfGlobalization is in no danger of going away, but if high energy prices subsist, it could mean a degree of repatriation of manufacturing and labor that in recent years has shifted offshore.There’s always some silver lining in any crisis…SWK

AfA • August 3rd, 2008 at 11:17 am

@ Alessandro,I do agree except maybe on the fact that I think that inflation, and therefore deflation, can come from outside the banking system and that (probably this is the main point where we diverge) reliquification is important in the short/ medium term (especially when it comes to massive speculinvestment in non producing/ unproductive activities)However, for the forced saving story, now that you explained it, I totally agree with you and can see it was mainly a wording issue: two sides of the same story??

JLC • August 3rd, 2008 at 11:56 am

@WAWAWAWAA counter-party takes the opposite side of a trade. If the entity on the opposite side of your trade becomes insolvent and unable to execute their end of the deal, that could have financial consequences for you. Hedges that you thought you had in place via this transaction end up vanishing, leaving you financially exposed where you thought you were covered. If you have a large volume of deriviative transactions with a particular counterparty, and they go bust, you are in big trouble.

kilgores • August 3rd, 2008 at 1:34 pm

Dr. Roubini:This post is the first time I’ve seen you refer to the length of the recession as a "minimum" of 18 months, in contrast to your previous assessment, repeatedly asserted over the past few months, that the recession would last 12 to 18 months. What do you now perceive the likely upper limit of it’s duration to be now?Thank you,SWK

kilgores • August 3rd, 2008 at 1:43 pm

@ AfA 12:46:08Yeah, what a visionary Mr. Cramer is! That the Wall Street Journal would print such a piece speaks volumes about that newspaper’s spotty reliability as a source for meaningful and accurate information. Of course, I’m not cancelling my subscription just yet…SWK

Guest1982 • August 3rd, 2008 at 2:19 pm

Cramer predicted everythinghttp://www.youtube.com/watch?v=dt8pd9xd2h4http://www.youtube.com/watch?v=qqlHCQbSerA

Alessandro • August 3rd, 2008 at 3:37 pm

Some highlights from poster Default over at CR. Very nice conversation."Default writes:Hey all,I just wanted to introduce myself and let you all know how much I appreciate your comments and knowledge. I work as a CDS (Credit Default Swaps) trader at a not-to-be named major Street firm. I’ve been lurking here for the past year and a half now – and the comments here have both colored my view of the markets and made me some pretty significant gains on the desk….That being said, myself and a few other traders in CDS have really started to lose confidence in the validity/usefulness of our product….Rob Dawg -You have more or less identified the weak link in the CDS space. For now, at least, folks on the Street believe that the Fed will ensure that counterparty risk never actually rears its ugly head – that major counterparties (a la Bear) will be continuously bailed out either by 1) a "strategic purchase" by another IB/CB, or 2) the Fed turning the notch on the firehose of "liquidity" it has directed at broker-dealers from "high" to "tear-apart-the-WTO-protesters" level….FRED -Your belief that the Fed bailout of Bear Stearns was really a bailout of JPM is the general belief across the Street. Like I wrote in my previous post, the Fed has a big firehose, and an even bigger lake to draw water from if the tank on the truck runs dry. They will do anything to keep this space from blowing up….Oh, and Lehman is alive because the Fed wants them alive. That’s really all I can gather from the situation – after the Bear Stearns blowup,CDS traders across the Street were given a stern talking-to, with the message being that all firms will take all other firms as counterparties – full stop. What killed Bear was the Street essentially saying that it would no longer take Bear on as a counterparty – no CDS, no repos, no rate swaps, no complex hedges.Do I like Lehman as a counterparty? No. If I ran a hedge fund would I trade with them? No. But the Fed giveth and the Fed taketh away, and the Fed has spoken.…Citi, LEHHonestly, at this point, CDS on big financials like these are pretty much pointless. They have been getting bailed out. They will continue to be bailed out. If they fail, you probably wouldn’t even get paid out on the CDS that you bought on them because they’re probably a counterparty to your counterparty…and we’re back to the problem I mentioned earlier, which the Fed will do everything in its power to keep from occurring….Dryfly -I trade CDS for a major Wall Street firm. I’ve been doing this for a couple of years now, after a much-detested stint as an investment banking analyst at another not-to-be-named Wall Street firm. I graduated from a not-to-be-named Ivy League school, and more or less "fell into finance" because its what was expected of a young man graduating from an Ivy. (We can get into a whole conversation regarding how bankrupt much of what goes on at the Ivies is at a later date).That’s about as detailed an explanation as I feel comfortable giving right now…seeing as how the layoffs won’t be stopping anytime soon across the Street, it might not be long before I’m posting as the Trader Formerly Known As Default….drone writes:No problem just wrap them with Ambac/MBIA insurance and they should be AAA, oops sorry I mean AA. Nothing can go wrong here.LMFAOThat’s what the guy who sat next to me said…I haven’t seen him in a few months though ;) …Such is the paradox of the Street – we might lose billions of dollars in a quarter due to positions moving against us, but we’ll be damned if we let some rinky-dink 100 million dollar hedge fund that we’ve got a $500,000 position with walk away without paying up.Penny wise, pound foolish….25 people standing in a circle all with a gun pointed to their left…probably the best description I’ve heard of the CDS market so far……Drone -I got turned on to Roubini about a year ago. He has been absolutely spot-on about everything that has happened thus far. Surprisingly, nobody on the Street wants to read him (or any of the blogs for that matter). What is it they say about a man believing in whatever he has to if his life depends upon its existence? If you’re a typical trader/ibanker, Roubini doesn’t exactly confirm your deep-seated belief that "models & bottles" are to forever be a major component of your lifestyle……Mr. Beach -If having a "risk guy" come by the desk and yell and scream that we have too much exposure to X or Y counterparty is considered a systematized method of reducing risk, then yes….Anonymous/Magnolia -Insurance companies are big big players in MBS world – that’s where I would expect to see alot of their losses coming from. SOMEBODY had to buy all those super-senior tranches…"http://www.haloscan.com/comments/calculatedrisk/2905972849574425576/

Alessandro • August 3rd, 2008 at 3:39 pm

[woops! sorry for the bold screwup should be fixed below]Some highlights from poster Default over at CR. Very nice conversation."Default writes:Hey all,I just wanted to introduce myself and let you all know how much I appreciate your comments and knowledge. I work as a CDS (Credit Default Swaps) trader at a not-to-be named major Street firm. I’ve been lurking here for the past year and a half now – and the comments here have both colored my view of the markets and made me some pretty significant gains on the desk….That being said, myself and a few other traders in CDS have really started to lose confidence in the validity/usefulness of our product….Rob Dawg -You have more or less identified the weak link in the CDS space. For now, at least, folks on the Street believe that the Fed will ensure that counterparty risk never actually rears its ugly head – that major counterparties (a la Bear) will be continuously bailed out either by 1) a "strategic purchase" by another IB/CB, or 2) the Fed turning the notch on the firehose of "liquidity" it has directed at broker-dealers from "high" to "tear-apart-the-WTO-protesters" level….FRED -Your belief that the Fed bailout of Bear Stearns was really a bailout of JPM is the general belief across the Street. Like I wrote in my previous post, the Fed has a big firehose, and an even bigger lake to draw water from if the tank on the truck runs dry. They will do anything to keep this space from blowing up….Oh, and Lehman is alive because the Fed wants them alive. That’s really all I can gather from the situation – after the Bear Stearns blowup,CDS traders across the Street were given a stern talking-to, with the message being that all firms will take all other firms as counterparties – full stop. What killed Bear was the Street essentially saying that it would no longer take Bear on as a counterparty – no CDS, no repos, no rate swaps, no complex hedges.Do I like Lehman as a counterparty? No. If I ran a hedge fund would I trade with them? No. But the Fed giveth and the Fed taketh away, and the Fed has spoken.…Citi, LEHHonestly, at this point, CDS on big financials like these are pretty much pointless. They have been getting bailed out. They will continue to be bailed out. If they fail, you probably wouldn’t even get paid out on the CDS that you bought on them because they’re probably a counterparty to your counterparty…and we’re back to the problem I mentioned earlier, which the Fed will do everything in its power to keep from occurring….Dryfly -I trade CDS for a major Wall Street firm. I’ve been doing this for a couple of years now, after a much-detested stint as an investment banking analyst at another not-to-be-named Wall Street firm. I graduated from a not-to-be-named Ivy League school, and more or less "fell into finance" because its what was expected of a young man graduating from an Ivy. (We can get into a whole conversation regarding how bankrupt much of what goes on at the Ivies is at a later date).That’s about as detailed an explanation as I feel comfortable giving right now…seeing as how the layoffs won’t be stopping anytime soon across the Street, it might not be long before I’m posting as the Trader Formerly Known As Default….drone writes:No problem just wrap them with Ambac/MBIA insurance and they should be AAA, oops sorry I mean AA. Nothing can go wrong here.LMFAOThat’s what the guy who sat next to me said…I haven’t seen him in a few months though ;) …Such is the paradox of the Street – we might lose billions of dollars in a quarter due to positions moving against us, but we’ll be damned if we let some rinky-dink 100 million dollar hedge fund that we’ve got a $500,000 position with walk away without paying up.Penny wise, pound foolish….25 people standing in a circle all with a gun pointed to their left…probably the best description I’ve heard of the CDS market so far……Drone -I got turned on to Roubini about a year ago. He has been absolutely spot-on about everything that has happened thus far. Surprisingly, nobody on the Street wants to read him (or any of the blogs for that matter). What is it they say about a man believing in whatever he has to if his life depends upon its existence? If you’re a typical trader/ibanker, Roubini doesn’t exactly confirm your deep-seated belief that "models & bottles" are to forever be a major component of your lifestyle……Mr. Beach -If having a "risk guy" come by the desk and yell and scream that we have too much exposure to X or Y counterparty is considered a systematized method of reducing risk, then yes….Anonymous/Magnolia -Insurance companies are big big players in MBS world – that’s where I would expect to see alot of their losses coming from. SOMEBODY had to buy all those super-senior tranches…"http://www.haloscan.com/comments/calculatedrisk/2905972849574425576/

Guest • August 3rd, 2008 at 4:09 pm

@ anybody with an opinionI know nothing about economics… just started following blog because of Roubini’s writings on housing. I’m wondering if it might be possible that due to the combination of rising oil prices and the current ‘downturn" in the US economy the next bubble could be fed by green technologies and alternative energy? No clue as to the politics and economics involved but I’m hopeful that it might be the beginning of an era of wiser management of resources (all of them – monetary, natural, labor, whatever they’re called)Links or references or opinions would be appreciated.

Kafka • August 3rd, 2008 at 7:09 pm

Now I am not that book smart and basically a hack currency trader but I did make some decent dough in 2006 and 2007 in part based on the good Doctor’s analysis. In particular I subscribe to Popper’s critical rationalism as part of any analysis. I am constantly evaluating numbers on a worldwide macro basis looking for anomalies from which to profit, I know a distasteful profession. In my simple view, the problem is your government spends too much with deficit financing on expenditures which bare no economic return. In the last 7 ½ years in nominal dollars the following increases have occurred: M1 24%, M2 55%, M3 86% and the national deficit essentially doubled from $4 .5 Trillion to $9.5 Trillion. In real terms, i.e. inflation or deflator adjusted, these numbers do not seem so bad as all the deficit spenders argue in comparison to the rest of the world. If it is not so bad, how come the dollar has devalued to comparable economies, 32% to the Pound and 65% to the Euro in the last 7 ½ years? The currency market prices never lie and adjust generally for relative differences in the strength of the economy and interest rates. The largest economic anomaly when you compare the U.S. to the rest of the world on a macro basis is defense spending (again I do not care if it is justifiable or not, I just want to understand and profit). Last year, the U.S. spent about $700 Billion with the next two closest competitors being China and Russia at about $60 Billion and $50 Billion a piece and the U.S. spends more on defense than all the nations on the planet combined. Some suggest if you comb through the budget, the true defense cost is $1.1 Trillion. The economic problem with defense spending is two fold: a substantial portion of it does not impact U.S.GDP as it goes to foreigners and to the extent it goes into GDP it impacts only a small few (as opposed to non defense government spending which generally is merely a redistribution of wealth). Thus, if you borrow a lot of dough (as Bush has done) and do not spend it the U.S. nothing good can result economically especially when it is mixed a confluence of other bad economic policies. This type of analysis has made me some good dough though that could just be dumb luck and many of the experts say the dollar has bottomed.

ewulf • August 3rd, 2008 at 7:15 pm

The markets flexibility, make a difference when it comes to the lasting time of any recession.Besides,It might be that because of higher movility of resources, the eventual domestic rigidity ,can be overcome,therefore inducing the slowdown to be a kind of short period of time.

Forensic economist • August 3rd, 2008 at 7:21 pm

More news from California (at least from Northern California)In California, thanks to Prop.13, assessed values are the last sale value plus 2% per year. Thus most properties are assessed well below market.From the East Bay Business TimesHousing Crisis Hist East County Tax RollsAssessor Gus Kramer… lowered values in Contra Costa County] for some 83,000 parcels out of 362,437 parcels… Contra Costa County finance director said her department would be briefing county supervisors aobut options to trim a potential $12,000,000 shortfall from this year’s budget… Solano County [which includes Vallejo]… included revaluations of 30,000 properties sold and purchased between 2004 and 2007 which lost a combined $3 billion in value during that period… leaders in East Contra Costa Cities were upset… they disagreed… $1 billion taken out of the city of Antioch [pop.c. 100,000]… "Do these people live in a cave? Do they live in Siberia?" Kramer ranted… the cities should stake heed now, he added, because values will drop again next year.This suggests that the layoffs of municipal employees are just starting and are unlikely to be reversed until the 2009 – 10 fiscal year.

Octavio Richetta • August 3rd, 2008 at 7:24 pm

Professor,congratulations on your Barron’s contribution. it looks like, day by day, more and more people are starting to take you seriously.I am back from our vacation in Margarita. We had a great time but with Venezuela being an Oil country prices are high so the cost of our stay was comparable to a US vacation.The latest from Maulding gives an excellent analysis of what to expect in the US stock market in the long term.http://www.frontlinethoughts.com:80/printarticle.asp?id=mwo080108

Kafka • August 3rd, 2008 at 7:34 pm

Most in my world take the good Doctor’s views very serioulsy especially the ones who have profited.

AfA • August 3rd, 2008 at 7:44 pm

Written by Guest on 2008-08-03 16:09:13 This may actually be a bright spot in the middle of all these bad news. However, I am not positive the change will happen in the medium term (that is the next 10 years). The main reason, I am not is because people who happen to make decisions or influence these decisions have everything to lose if current energy models/ infrastructures are abondoned. These companies/ people invested too much that they just cannot let new energy development take place. It is a practical problem too, it doesn’t take years (no, neither months) to undo all sunk costs (life style, gas-based cars, roads, refineries, political rigidities …) I am not trying to be negative or pessimistic, but an economy loses its flexibility once it is over-built according to a specific model (you may think Windows vs. Linux operating systems, however shifting from WIN to Linux involves low costs/sacrifices and even that, Linux developers "waste" much time/ opportunities just to make it compatible with WIN’s programs. If Windows was not so widely used, we may have been now with much better operating systems. Same story with internet 2.0). However, I am confident that if high energy prices continue, we may hopefully witness a beginning in convictions and investments that would lead to a structural change, although its benefits would not be seen before long. @ WAWAWAWAWAWAWA…..etc Could you please avoid posting such videos in the evenings, it’s not good for my sleep with my insomnia problems :)

Octavio Richetta • August 3rd, 2008 at 7:54 pm

Written by Alessandro on 2008-08-03 10:08:50Why not post the the comment along with the link? Save people some time looking for text strings that do not exist in the thread:-)Default writes: Hey all,I just wanted to introduce myself and let you all know how much I appreciate your comments and knowledge. I work as a CDS (Credit Default Swaps) trader at a not-to-be named major Street firm. I’ve been lurking here for the past year and a half now – and the comments here have both colored my view of the markets and made me some pretty significant gains on the desk. A couple of the more "forward-looking" guys on the desk have started lurking here at my prodding as well – but for the most part, folks working on the Street are completely ignorant of the larger calamity we face in the fixed income markets/equity markets/world trade/the world in general. There is a degree of subtle intimidation that gets directed at those who question the sustainability of what we do on the Street, and so, for the most part, people trade their "product" and keep their heads down while praying for this year’s bonus to be flat to last year’s. The looks one gets when bringing up the existence of significant unaccounted for risks in my space (counterparty risk being the greatest) are not those that correspond with large EOY bonuses. And what are us traders if not profit-maximizing incentive-internalizing machines? But I digress…That being said, myself and a few other traders in CDS have really started to lose confidence in the validity/usefulness of our product. After all, if things really turn out the way that they look like they will, how many of our counterparties will have the money to pay up for their obligations? The fact that you are exposed to (what the street likes to call "residual", but what I consider MAJOR) counterparty risk in these transactions significantly impacts their value both as hedging and speculative instruments. For those of you more academically inclined, I would only point to the existence of the "basis trade" for proof of the contradictions within the CDS space.Anyways, I just wanted to say hello, and let you all know that I appreciate your continued proffering of information. Know that even at those institutions that many of you vilify daily (and for the most part, rightfully so), there are those of us who are on board with you, and would like to see the business change fundamentally to once again engage in its original purpose: the proper assessment of risk and the prudent allocation of capital.Cheers,Default | 08.02.08 – 10:10 pm | #

Forensic economist • August 3rd, 2008 at 8:05 pm

More news from California (at least from Northern California) In California, thanks to Prop.13, assessed values are the last sale value plus 2% per year. Thus most properties are assessed well below market. From the East Bay Business Times Housing Crisis Hist East County Tax Rolls Assessor Gus Kramer… lowered values in Contra Costa County] for some 83,000 parcels out of 362,437 parcels… Contra Costa County finance director said her department would be briefing county supervisors aobut options to trim a potential $12,000,000 shortfall from this year’s budget… Solano County [which includes Vallejo]… included revaluations of 30,000 properties sold and purchased between 2004 and 2007 which lost a combined $3 billion in value during that period… leaders in East Contra Costa Cities were upset… they disagreed… $1 billion taken out of the city of Antioch… "Do these people live in a cave? Do they live in Siberia?" Kramer ranted… the cities should stake heed now, he added, because values will drop again next year. This suggests that the layoffs of municipal employees are just starting and are unlikely to be reversed until the 2009 – 10 fiscal year.

Octavio Richetta • August 3rd, 2008 at 8:21 pm

In case you missed it, Hussman’s last Monday’s comment tells all that is wrong with the housing, namely the freddie and fannie. One more guy that agrees with the Professor on how the government focus is on bailing out the wrong people. This piece is an excellent complement to what you have been reading here on the greatest rich people bailout in the history of mankind.http://www.hussman.net/wmc/wmc080728.htm

Octavio Richetta • August 3rd, 2008 at 8:23 pm

In case you missed it, Hussman’s last Monday’s comment tells all that is wrong with the housing [bill], namely the freddie and fannie [bailout]…

Huey Lewis • August 3rd, 2008 at 8:24 pm

"If things are bad, they are bad, need to learn how to live with it and if we want to make things less worse or ulimately better, we need to move our a$$es."Sometimes (emphasis) Bad is Bad!

Guest • August 3rd, 2008 at 8:31 pm

AfA: “Americans will have to work twice as much and be paid mimimum wage." 2008-08-02 20:24:14 To join the world TPTB have planned for us appears to mean a surrender of our standards and our freedom and our aspirations — to work “twice as much and be paid minimum wage.”John D. Rockefeller, Sr. used the power of his bank fortune in 1904 to set up a General Education Board foundation, apparently less to influence the direction of education than to promote collectivism and internationalism. His grandson, David Rockefeller, carries the torch today. The GEB’s objective was to use the classroom to teach attitudes that encouraged people to be passive and submissive to their rulers. The goal was to educate citizens for productive work under supervision but not enough to question authority or to seek to rise above their class. It was the forerunner of Hilliary’s 1994 failed School-to-Work program — requiring students to participate in vocational training kindergarten through 12, using the state to force them to choose a career pathway by 8th grade – their “choices” to be decided by the state.Is true education to be restricted to the sons and daughters of the elite, a la Ted Kennedy? Are skilled workers to have no particular aspirations other than to enjoy life – sex, lavatorial Hollywood limericks, four-letter words from acute arrested development ceasing at 16 or so, pornography, lotteries, drugs, unprovoked hate, and moral degrade music?Is it enough, as Alexis de Toqueville phrased it, “that the people should rejoice, provided they think of nothing but rejoicing?” (“Democracy in America” 1805-1859)In 1904, Fred Gates, writer of “Occasional Paper No.1” for John D’s General Education Board foundation, explained Rockefeller’s plan:“In our dreams we have limitless resources, and the people yield themselves with perfect docility to our molding hands.“The present educational conventions fade from out minds, and unhampered by tradition, we work our own good upon a grateful and responsive rural folk. We shall not try to make these people or any of their children into philosophers of mental learning or of science. We have not to raise from among them authors, editors, poets, or men of letters. We shall not search for embryo great artists, painters, musicians, nor lawyers, doctors, preachers, politicians, statesmen of whom we have ample supply. “The task we set before ourselves is very simple as well as a very beautiful one: To train these people as we find them to a perfectly ideal life just where they are… in the homes, in the shop, and on the farm.”

Guest • August 3rd, 2008 at 8:42 pm

National Public Radio quoted John Bogle, founder of Vanguard Mutual Fund, yesterday. According to NPR, Bogle said that companies on the list of 500 will be fine and develop okay, but it’s going to be a bumpy road over the next ten years.

Octavio Richetta • August 3rd, 2008 at 8:54 pm

http://www.businesscycle.com/news/press/1627/Debunking "technical" Recession Confusion Fox Business2-August-2008(Fox Business) – ECRI’s managing director, Lakshman Achuthan, was a guest on Fox Business Friday to discuss the monthly jobs report. Lakshman also had a chance to clarify the folly of the back-to-back negative GDP recession label[link to video]

Octavio Richetta • August 3rd, 2008 at 9:34 pm

Reading this one was more satisfying than a salmon ambush for a bear:-)http://online.wsj.com/article/SB121780799690808613.html?mod=hps_us_whats_newsVan Wagoner to Step Down As Manager of Growth FundBy DIYA GULLAPALLIAugust 4, 2008Van Wagoner Emerging Growth has consistently disappointed investors, giving it a dubious distinction as the worst-performing U.S. actively managed stock fund over the past 10 years.But at least one thing is changing at the woebegone fund: Longtime manager Garrett Van Wagoner is planning to step down. Even though Mr. Van Wagoner, 52 years old, controls the company that sponsors the fund, Van Wagoner Capital Management.When asked about his best stock pick of the past year, he says, "I don’t know if I have any best picks."Specializing in the volatile world of small-growth stocks, many of them tech firms, Emerging Growth has clocked an annualized 10.2% loss for the past 10 years. During that time, actively managed domestic stock funds were up an average 5.6%, according to fund tracker Morningstar Inc. For 2008, the Van Wagoner fund is down 28%, about twice as bad as the broad market’s fall.The fund’s board has proposed a new subadvisor, Husic Capital Management, to run it. This seems an odd choice. Morningstar notes Husic was removed from the Vanguard Capital Opportunity fund 10 years ago for performance reasons. "That was a long time ago," says founder Frank Husic, who adds that results have been strong since then.The backdrop here is that today’s market is just slightly ahead of where it was 10 years ago. The Standard & Poor’s 500-stock index has advanced only 2.9%. It has remained roughly flat when inflation is factored in.In fact, about 95 stock funds have delivered negative annualized returns in the past 10 years. Around two-thirds are growth offerings haunted by bear-market declines earlier in the decade, such as the $4.8 billion Vanguard U.S. Growth, the biggest, down 3% over the past 10 years.The difference between the Van Wagoner offering and the likes of the Vanguard fund is that the latter group has largely had a decent past five years. For the Van Wagoner fund, the pain has continued.Mr. Van Wagoner is a vociferous fellow who started Van Wagoner Capital Management in 1995 and regularly appeared on CNBC during the technology-stock bubble. He makes himself available to investors by posting his e-mail address on his Web site. He says he manages the stress of running the funds with regular exercise workouts.The fund’s new managers have their work cut out for them. After delivering a nearly quadruple return in 1999, amid the tech-stock boom, Mr. Van Wagoner has posted negative annual returns for seven of the past nine years.For the privilege, it charges investors about 5% of assets in yearly expenses, more than three times the level of the typical stock fund. Mr. Van Wagoner says fees are so high despite efforts to reduce it because it is spread among a declining asset base."Of course, I feel bad for people who’ve hung in there and lost a lot of money," says Mr. Van Wagoner.The fund’s only two positive years since 2000 were 2003 and 2006. The 2003 showing came amid a strong rebound for growth stocks after the bear market. The 10.8% performance for 2006, though, still trailed the S&P 500′s total return by five percentage points.The biggest decline came in 2002. The fund fell 67% that year, as small software companies like Embarcadero Technologies and I-many lost 75% of their value.Mr. Van Wagoner thinks his approach of reviewing company fundamentals has gone "the way of the dinosaur." He believes the market has shifted to trading with a herd mentality that doesn’t reward the small, risky technology companies he focuses on.A recent case in pointone of his biggest holdings, tech firm 3Par in Fremont, Calif. It is down about 31% this year as investors worry about its ties to the beaten-down financial-services industry, even though Mr. Van Wagoner thinks prospects are strong. "Every time a big company sneezes, I catch pneumonia," he says.The fund’s board has a reform plan, and shareholders will vote on it in the coming months. It hopes to bring fees down closer to 2% within the next year. It has also been working to reduce board-member compensation.The fund could still shut down if the changes don’t drum up new investors, says the board’s chairman, Ed Pittman. Mr. Pittman is an attorney in Washington D.C. with law firm Thelen Reid Brown Raysman, where he advises money managers on matters like enforcement proceedings. While Mr. Van Wagoner is "an expert in stocks," his picks "generally haven’t done very well," Mr. Pittman says.Only one board director had any of his own money in the funds as of the latest disclosures, keeping $10,000 to $50,000 in Emerging Growth. Mr. Pittman says he isn’t invested because the fund is too narrowly focused but could change his mind when it broadens.The SEC alleged in 2004 that Mr. Van Wagoner was improperly valuing securities. He settled for $800,000 without admitting or denying wrongdoing and continued to manage funds at his eponymous San Francisco firm. The firm’s funds are down to less than $50 million in assets from $3 billion in 2000.

Guest • August 4th, 2008 at 12:58 am

WAWAWA, Thanks for the link to NPR’s interview with Bogle. Here’s what Bogle had to say as I heard it on Bogle: “Financial System’s Woes Hit ‘Real’ Economy” on National Public Radio. I thought it worth repeating.August 2, 2008 · Scott Simon talks with John Bogle, the founder of the Vanguard mutual fund giant, about the continuing mortgage crunch and the stock market’s downturn. Bogle says this bear market is different from previous ones because problems with the financial system are affecting the "real economy."Of the ten bear markets we’ve weathered, Bogle said, the first nine were caused by the overdoing of the financial markets themselves. What’s different about this one, he said, is that the financial system itself now has taken such a huge role in our society. The real problem is that the faults of this system are creeping into parts of the real economy, into the manufacturing sector, into the consumer sector. The financial system is usually the source that brings about cycles and speculation in markets, he said. And that is very different from investing, he said.The key point here is that the financial system used to be built on investing in owning businesses and holding forever. Now that system is heavy on speculation. In 1929, stocks were turning over at a rate of about 130 percent a year, he said. In his first twenty years of investing, Bogle said the rate was about 20 or 30 percent; now they’re turning over about 280 percent a year, he said. “That’s without precedent in our history.”It’s all about traders and speculators pushing paper back and forth to each other that flows into the creation of “innovative” new financial instruments of unbelievable complexity, designed to make money for those who are selling them to those foolish enough to buy them.And now we’re privatizing rewards for the financial sector and socializing their losses; the banks are too big to fail, but the man on the street is too small to bail. The executives on Wall Street and at Freddie Mac and Fannie Mae made huge, staggering amounts of money. The people who invested in those securities lost huge amounts of money. But when it has fallen apart, those who made staggering amounts don’t’ give any back.Bogle said Congress had to bail the mortgage agencies out. These are instruments we have all over the world that are invested in. We could not fail to honor the implied credit of the United State government. But, he said, Congress has been so politicized by these agencies that it didn’t even develop the basis of a new system for running these agencies, a more demanding one that would control the amount of their leveraging and their costs.Bogle foresees a fairly extended period in which the present crisis in the financial system will spread out into the general economy. He predicts housing will take a long time to recover and that the present level of consumer spending will be very hard to maintain. He said he is reasonably but not highly confident that companies in the S&P 500 list will be making a lot more money in ten years than they are today but that between the next ten years and now there will be bumps in the road that are quite severe.I’d like to add, IMO, that most people, including John Bogle, are missing the point when they portray the potential failure of agencies such as Freddie and Fannie as important to the integrity of the United States’ line of credit. The bottom line is, those who invested in them, whether from Newark or Beijing, did not invest in the United States, they invested in the stock market — a market where there is a chance to make money — and to lose money. There are millions of Americans who knew better than to invest in schemes where they could lose all their money. But even though they were cautious, they are going to lose their money anyway…in these bailouts!

Guest • August 4th, 2008 at 4:26 am

-crashless depression-i like this term a lot, crash will eventually takes place,but i cant see it in the near future,with the power TPBT wields, and the various mechanism that they have at their disposal, crash is a thing of the past,plus dont underestimate the power of Hope, sheeples will and is waiting for the bottom in the market/downturn in the economy/real estate (eventhough when weve reached rock bottom its already too late), every upside movement is recognized as a recovering rally.. then (suddenly, yeah suddenly)selloff their hopes falls again, BB/Paul have saved the market allright,… we are now zombified…im just wondering how long can this game go on..

Alessandro • August 4th, 2008 at 4:48 am

Guest on 2008-08-04 04:26:27: "im just wondering how long can this game go on.."Current world record belongs to Japan with 19 years and counting (measuring from the peak of stock and housing bubbles in 1989).Factoring in the huge cultural differences I’d expect a faster crash track for the US, but I don’t see how things will be happy again before 2011/2012 (6/7 years from housing peak in 2005). Mish and CR have similar time schedule, but they differ substantially on their estimate of the economic damage.

Guest • August 4th, 2008 at 5:09 am

true Alessandro,but Japan is not the world foremost top comsumers, Japan lost decade have only affected them…. in fact their MNC’s are still doing good, i think there will be crash, but not like we (ok i) imagined (fast crash ala 1920s)well I hope Peak Oil or Global warming/cooling comes first :D

Octavio Richetta • August 4th, 2008 at 5:44 am

@Octavio Richettawelcome back!Written by Alessandro on 2008-08-04 03:23:01Thanks! I will be gone again in a few days. On my previous post to you, my apologies; I hadn’t gotten to your lengthier post on the subject when I wrote it. Any views on the Russell 2000 anyone?BTW, I agree that the Bloomberg piece doesn’t paint an accurate picture of the world economy in the short, even medium term; but, IMO, that is the the responsibility of the Bloomberg reporter. I agree with the comment above that the Hollywood ending, or should I said Bollywood ending:-), doesn’t fit.

Guest1982 • August 4th, 2008 at 7:25 am

More lies from CNBC – how Jim Cramer predicted everythinghttp://www.youtube.com/watch?v=Udjx0f93Wbk

kilgores • August 4th, 2008 at 7:39 am

@ Guest1982 on 2008-08-04 07:25:10>More lies from CNBC – how Jim Cramer predicted everythingIf they keep this us, Mr. Cramer is going to begin believing it’s true! ;-) SWK

OuterBeltway • August 4th, 2008 at 8:46 am

Cross-post from LB’s "Fisher’s Debt Deflation Theory" thread.=====================@Alessandro:This phrase, I think, is what captures the essence of why things went off the rails so badly:"And since people have no choice whether to save or not and how to allocate the savings, credit mis-allocation can happen on a massive scale."@LB: What I am gradually realizing is that the "market" isn’t really being used to make allocation decisions – the profile of decision-making is acting very centralized, and I’m not seeing any economic or political forum where these massive allocation decisions are getting openly discussed.If, indeed, these decisions are made by a small subset of the full market "intelligence", you perforce wouldn’t get a normal distribution of investment successes and failures. You’d get what we’re getting: distortions and excesses.Let me propose a thought experiment, and I address myself to all thinkers on-deck at the moment. Suppose that:a. The essence of banker’s wisdom (what’s a viable business, evaluation of current business conditions, character assessment, quality of mgmt team, etc.) were to be packaged and installed way, way down on the capital-distribution pyramid – right in the same marketplace proximity to the use-of-capital ("local", in every relevant meaning of the word)b. Suppose this could be done without too much diminution in the quality of the "banker wisdom" – that the banking decision-making was good, it was ubiquitous, it was timely-applied – and the price/performance ratio of this applied knowledge was strongly positivec. Suppose this "local banker" could tap local, regional, national and global sources of capital, and apply it locally under his/her aegisJust suppose.Now, my question: what effect would that have on an economy? Would it really tend to move capital toward its greatest use? Would it really make any difference in the boom-bust cycles? If so, why? If not, why not?I’ve got a bee in my bonnet about "allocation". I want to generate some alts, but I don’t want to alt my way into a worse situation.Feel free to respond here or, maybe better, at outerbeltway at yahoo dot com. Alessandro, you said something a while back that I want to focus on in a off-line conversation. Please drop me a line directly when you get a free moment. I want to pick your brain about some notion I’m developing.O.B.Written by OuterBeltway on 2008-08-03 13:57:45

Guest • August 4th, 2008 at 9:21 am

aha,are we gonna print alots of money? NR replied, no we gonna print alots of debt. my prediction, eventually we will print alots of money and debase dollar in the process. or god forbid, we default on debt we printed.

Guest • August 4th, 2008 at 9:56 am

@ Outer Beltway: “Suppose this "local banker" could tap local, regional, national and global sources of capital, and apply it locally under his/her aegis… Just suppose…. Now, my question: what effect would that have on an economy?Might this apply?:“The Arrogance of Greenspan” by Butler Shaffer…Alan Greenspan appears to be equally ignorant of the limitations complexity imposes upon those who presume to direct it. There is probably no realm of human behavior that is more subject to variation and inconstancy than the economic activity through which billions of people spontaneously interact with one another in unpredictable ways.No one who understands the dynamics of both the marketplace and chaotic systems, would have the hubris to think that he or she could manage economic life toward any generally accepted ends. The study of chaos informs us of the impossibility of marshaling and measuring all of the factors that play upon events in our lives. When we act without complete knowledge – as it is our fate to do – there will always be some error in our calculations that will continue to influence future events…The same analysis holds true for Alan Greenspan’s causal contributions to the economic turbulence in which the American economy now finds itself. Had he been informed of the unpredictable nature of complexity, his intelligence might have suggested to him that a Federal Reserve Board presuming to "run" an economy was about as absurd as turning over to NASA the task of running the solar system!Whether Greenspan suffered only from a lack of depth understanding of complex systems – such as an economy – or whether the lure of political power was too much for him to resist, is a question only he can answer…In regarding it as a "duty of political leadership" to convince others of their "plain wrong" thinking, Greenspan gets to the essence of every political system. Political leadership is inseparable from the exercise of state coercion, and while many speak of the "arrogance of power," every exercise of power by which some coerce others is the essence of arrogance!The title of his book [The Age of Turbulence] is a giveaway to what his political career has been about. In presuming to prescribe and direct the complexities and uncertainties of a system that is beyond anyone’s power to control, Greenspan’s policies have been a major contributor to the "turbulence" of which he writes. But by insisting upon the exercise of such power as a "duty of political leadership," the man inadvertently confesses to an arrogance that defines such "leadership." In this era of totalitarian empire-building, his book ought to have been titled The Age of Arrogance…In the humility that arises from knowing that our understanding of the world derives from the limited nature of our experiences, we may find the basis for a tolerance of others that dissuades us from using force (i.e., Greenspan’s "political leadership") to compel their obedience to our subjective views.It is an insistence upon epistemological certainty – wrapped in the arrogance of self-righteousness – that makes people-pushers of all persuasions an annoying and dangerous crowd… But, lacking the omniscience for generating predictable outcomes, what are the likely consequences of such actions?The question that continues to intrigue me, however, is why the rest of us are willing to accept such people as authorities over us? There was something pathetic in watching millions of otherwise intelligent men and women awaiting the pronouncements of Alan Greenspan as to whether they will enjoy a bright or dreary future.Greenspan’s role has been taken over by Mr. Bernanke, with ordinary people and politicians now hanging on every nuance of his words; or looking for facial expressions, that might carry some hidden meaning as he, too, attempts to inject certainty into an uncertain world. Society has been rendered turbulent by centuries of the Platonic belief that philosopher-kings could render the world a better place.It is time for us to give up our belief in such Olympian-wizardry, and get back to the task of cleaning up our respective corners of the turbulence in which our innocence has left us.Butler Shaffer teaches at the Southwestern University School of Law.http://www.lewrockwell.com/shaffer/shaffer180.html

Guest • August 4th, 2008 at 10:16 am

“The fiction of corporate transparency” — “Just 2 weeks after reporting earnings, Merrill Lynch said it would have to take a $5.7 billion write-down in the third quarter. How could the financial giant have missed that?”By Bill Fleckenstein …The Securities and Exchange Commission has made a big fuss about changing the rules for shorting stocks, but that’s like shooting the messenger. The commission ought to spend its time making sure companies tell the real story and file financial forms that are accurate.Eminently deserving of the SEC’s focus, for example, is the flurry of headlines surrounding Merrill Lynch (MER, news, msgs). Last week, just two weeks after reporting earnings, the company said it would take a $5.7 billion write-off in the third quarter.Yet in a conference call at the time of the earnings report, when CEO John Thain was pressed about why Merrill wouldn’t liquidate assets in need of liquidation, he assured folks that it wasn’t something the company needed to do. He also repeated a familiar refrain: that Merrill didn’t need any new capital to support its business. "Right now we believe that we are in a very comfortable spot in terms of our capital," he said.What did Merrill miss?So the question is: What changed in the past couple of weeks to cause a CDO — a package of loans known as a collateralized debt obligation — valued at 36 cents on the dollar to be "sold" last week at 22 cents? What did Thain know about this at the last conference call, and why was it not made clear to folks?… I know that markets change rapidly, but it’s hard for me to believe that the value of this security could drop so fast in just two weeks. This is the sort of thing the SEC should be investigating.On a related topic, the SEC has also announced an investigation into negative rumors that "hit" Lehman Bros. (LEH, news, msgs). Funny, I don’t remember the SEC ever investigating buyout rumors surrounding Lehman or Bear Stearns. Nor do I recall the SEC looking into erroneous bullish pronouncements from many entities that touched off this mortgage crisis in one way or another — i.e., IndyMac Bancorp (IDMC, news, msgs), Washington Mutual (WM, news, msgs), New Century Financial (NEWOQ, news, msgs), Toll Bros. (TOL, news, msgs), etc.Certainly, the SEC has long turned a blind eye to bullishly oriented market pranks such as quarter-end markups…http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/TheFictionOfCorporateTransparency.aspx

Guest • August 4th, 2008 at 10:21 am

Citigroup Posts Loss on Credit-Card Securitizations (Update1) Aug. 4 (Bloomberg) — Citigroup Inc. reported its first loss since at least 2005 on credit-card securitizations, signaling that risks may be growing in a business that generated $3.5 billion of revenue in the past three years.The biggest U.S. credit-card lender lost $176 million in the second quarter packaging card loans into securities, the company said in an Aug. 1 regulatory filing. The New York-based bank completed fewer deals and was forced to mark down its own $9 billion stockpile of the debt instruments and other stakes the company amassed while selling them to investors. Led by Chief Executive Officer Vikram Pandit, 51, Citigroup manages about $202 billion of credit-card loans worldwide, about $111 billion of which have been turned into securities and sold, according to the filing. Delinquencies on the securitized portion have jumped by 16 percent since the end of last year to $2.16 billion as of June 30, Citigroup said. The firm’s results may portend similar losses for rivals.

C. Sullivan • August 4th, 2008 at 10:28 am

Dr. R. in his article on the Barron’s interview "Yes, That’s 2 Trillion of Debt-Related Losses,touches on an issue which I do not see being discussed at all, either at the acedemic or the business environment level. He says:"…the emergence of India and China…is going to shift global economics and politics radically, and the world is going to be more balanced in the future, rather than relying on one engine, which is the U.S…"The implications of that shift in the global balance of economic power is staggering for Americans. It portends a significant reduction in our standard of living as more wealth is transferred to emerging economies. It is a bit like water seeking its own level. Our living standards will decline as productivity moves to more efficient markets. At the same time, inflation will become more of a problem since we will have less control over production/labor/transportation costs. Consider the impact on the American labor unions, income levels, housing and a whole host of other aspects of our economy we currently take for granted. While we may work through the credit impasse in a relatively short few years, the adjustments necessary to account for the loss of our historically strong economic position may take generations.

Guest • August 4th, 2008 at 10:35 am

Why gold has risen and the dollar fallen…Posted by Michael S. Rozeff at August 3, 2008 06:32 PMGold renewed its large rise starting in July, 2005. That is also when the housing stocks (equities) started to decline and when the dollar started falling against the euro.The key element here is this: housing stocks fell. Bank stocks joined the decline later, in 2007.The value of bank assets fell when the mortgages went bad and housing prices declined. That meant that the assets backing the bank liabilities lost value, and those liabilities include bank deposits or MONEY. As the assets lost value, so did the value of the dollars on the other side of the balance sheet. (The value of assets must equal the value of liabilities + value of capital.)The Fed did not inflate the money supply during this period. That did not cause the loss in value of the dollar. This loss in value was not a quantity-theory phenomenon. Instead, as the value of the assets backing the dollar declined, so the value of the dollar declined. Even though we have a fiat money system, the dollars that the banks create are matched by the loans they make. They try to make good loans, but in this episode they failed.According to the theory I am outlining, the Fed’s transfer of good assets (T-bills) to the banks won’t help the dollar’s value recover. That is like shifting those bills from one pocket to another pocket. The dollar won’t recover until the U.S. economy itself recovers and begins producing returns and wealth, because these are the real backing of the dollars in circulation.A reduction in war-making would help the dollar because the resources would then be turned to more productive outlets. Any reduction in the size of government will help the dollar. However, under Obama, that is not at all likely. We will have to wait for a natural recovery of the economy.(Rozeff is an economist.)http://www.lewrockwell.com/blog/lewrw/archives/022246.html

Guest • August 4th, 2008 at 12:04 pm

Just got my August 4 issue of Barron’s. Barron’s did Roubini proud – a dramatic full-length photo of Roubini standing on a grated manhole cover in the early morning deserted street of a downtown Manhattan row of silent high rises (banks?. The caption: “A systemic banking crisis will go on for a while, with hundreds of banks going belly-up.” Nouriel Roubini.It’s a double-truck presentation, befitting the Professor.The Index blurb: “He Saw This Mess Coming” AN INTERVIEW WITH NOURIEL ROUBINI: Maybe now somebody will listen. Robin Goldwyn Blumenthal

Guest • August 4th, 2008 at 12:36 pm

@C. Sullivan: “Our living standards will decline as productivity moves to more efficient markets.”It will be a sadder and poorer world if the final remnants of America’s free enterprise system – built on liberty and property rights and man’s good will — are dismantled and reassembled on totalitarian shores. The financiers and CEOs, almost all internationalists without fatherland or conscience, are playing for money. The majority of Americans place God and country and family above greed. Many give and have given their time and lives for the values and principles that have kept this Lamp of Freedom alight for mankind.As our economy worsens and asset values fall, self-called capitalists will rake in the shekels and make fortunes by buying up the wreckage they themselves have created. Aided by Congress, they are ruling the world right now and have their knife in America.But there is no way the corruption and cruelty of socialism and third-world totalitarian graft can ever produce “more efficient markets” than did the natural forces of self-interest and freedom of millions of individual hands and the wisdom of many free minds working together under the freedom that America gave. America raised the standard of living of the entire world and brought those seeking opportunity and justice to her shores. Socialism and totalitarianism lead back to “the road to serfdom.” America’s middle class is the victim of this warfare for gains. It is the middle class that will be the reservoir of the resistance. It is beginning.Aleksandr Solzhenitsyn, who died yesterday in Moscow at age 89, left the West with an enduring warning: “Man has set for himself the goal of conquering the world but in the processes loses his soul.”

Softwarengineer • August 4th, 2008 at 12:58 pm

TIP OF THE ICEBERG EFFECT?Is the "American Titanic Economy" just hit the tip of the iceberg on financial mess? Is the next wave coming to a theater near you soon much worse, higher unpaid priciples, much greater bank loss and much higher rate of home foreclosures?In my humble opinion, I think so. Moving the chairs around on the Titanic [the latest $0.3 Trillion Housing Bill] is apparently like burning tax money in a bon fire anyway, the rising unemployment and sluggish economy will eventually bull doze these houses down soon anyway. The $0.3 Trillion could be better used as bull dozer and trash removal of excess housing built in America?Is the recent 15% drop in gasoline use due to demand reduction or a recent undocumented American population reduction [how can you track undocumented?] due to job butcher axing? Both parties and the media are apparently in denial over this pragmatic news?

Guest • August 4th, 2008 at 1:01 pm

Dow at 11,100 to 11,300 enter absolute threshold for bear market declaration. HEAVY effort to hold that floor. Once pierced and held substantially, next stop big drop.

Guest • August 4th, 2008 at 1:07 pm

A.S., wise man changed and bettered by suffering–makes borrowed pronouncement that should be the constant reminder of mortal man. "For what is a man profited, if he shall gain the whole world, and lose his own soul? or what shall a man give in exchange for his soul?" Where to invest, and at what price materialism? When ego, self-worth, social status, awe merge into a worship of acquisition–that is THE BUBBLE that leads to decline. Contraction of character precedes national downturns.

Guest • August 4th, 2008 at 1:17 pm

At guest on 13:07:49:What talent you have. What significance in your words. I will retain them in my memory. As long as there are people like yourself, there is hope for America.

oller • August 4th, 2008 at 1:18 pm

Where is the future of a renassaince for this Economy?Can we have a Manhattan-like Hydrogen Fuel Cell Internet Supergrid Transformation. Can we rise from the ashes and convince vested interests to pull in the same direction to create a New Carbonless Economy? Will the Investors in the rest of the World regain confidence if we become Engineers again as opposed to perpetual derivatives bubblers? We should be formulating a Crash Program to come back from the abyss. I think the professor has faith in the Global Economy, because he sees the Technological Efforts elsewhere that have not been appreciated by our political establishment. We were having such a great time blowing derivative bubbles that we forgot to join the World in Constructing the Future. Can you give some feedback? I know for a fact from previous postings that we have Quants that should have stuck to Rocket Science lurking in this Blog.

GLOOMY • August 4th, 2008 at 1:20 pm

REALTY REALITY CHECKAfter reading this, I thought maybe I should change my name from Gloomy to Sunny Jim."Logic and history dictate that prices must come down by 50% in the US and over 60% in the UK, just to get back to where they came from. However, that is still not the whole story: a large trendline-breaking upswing in a system is typically followed by an even larger downswing. But let’s forget about the oscillation factor for a moment. Respective real estate value declines of 50% and 60% can only lead to one outcome: the complete destruction of the US and UK economies. In systems terminology: there is no flexibility or resilience left in the economic and financial systems. They have been stretched to the limit, and are about to snap.And that is why I am 100% sure that home prices will keep on falling, and lose over 80% of their peak values. In the US, Canada, all of Europe, Australia, and most of Asia, including China and Japan. It is inevitable in a world where money and credit are busy vanishing into thin air. "http://theautomaticearth.blogspot.com/2008/08/debt-rattle-august-3-2008-awful-news.html

AfA • August 4th, 2008 at 1:30 pm

Any prediction on what would be the effects of declining oil prices on banks, hedge funds and pensions by the end of Q3 if the current trend continue?

farmboy • August 4th, 2008 at 1:55 pm

@Softwarengineer on 2008-08-04 12:58:05You can track illegal alien populations using the credit bureaus.From Cringely:The first thing to be noticed is that these supposedly invisible people have been, well, noticed. The credit reporting agencies have a handle on total numbers and have a lot of information on specific individuals. So members of the gray economy are, for the most part, not invisible at all, just difficult to identify as individuals. But thanks to data mining down at the credit bureau, it is getting harder and harder to hide.A lot of this sleuthing comes down to a surprising artifact, the Social Security number. One would think that surprising for an economic class of people best known for not having Social Security numbers. Ah, but they do have Social Security numbers, just not their own. You need a Social Security number to sign up for utility services, for example. No Social Security number, no electricity, gas, phone, or satellite TV. So what’s a poor alien to do? They go down to some local hangout and BUY a Social Security number to give to the utility. This has to be a legitimate number or it won’t fly with utility computer systems, but does it have to be the customer’s own number? Good question.

GLOOMY • August 4th, 2008 at 2:05 pm

ANNOUNCING THE UNITED STATES SOVREIGN DEBT FUNDFannieFreddieMerrill LynchCitiMorgan StanleyGoldman SachsBank of AmericaGMFordChryslerThe entire airline industryQuite a portfolio, isn’t it?

Guest • August 4th, 2008 at 2:14 pm

@AfA: “Any prediction on what would be the effects of declining oil prices on banks, hedge funds and pensions by the end of Q3 if the current trend continue?”Well, here is a tidbit of rumor – the accuracy of which I have no idea. A California teacher who just retired after 20 years at more than salary told me that the bulk of teachers’ pension money is in oil. If so, the market giveth and the market taketh away. The next question is, will the government giveth back to the teachers, and taketh it away from the taxpayers?Which reminds me of a cartoon of a consumer standing in an empty doggy dish with a great big-toothed monster named Economy getting ready to take a big bite out of him. He’s answering a pollster on "How’s consumer confidence?" Looking a little wan and perplexed, he replies, "I’m not sure I’m still the consumer."

Alessandro • August 4th, 2008 at 2:15 pm

@GloomyLOL! Sovereign debt fund! That was a good one!And you sure need to add the US Treasury to the portfolio.

Guest • August 4th, 2008 at 2:25 pm

@farmboy: “They go down to some local hangout and BUY a Social Security number to give to the utility. This has to be a legitimate number or it won’t fly with utility computer systems…”I was changing my business account from Washington Mutual to another bank and had to come with all kinds of verification that, ungrammatically, I am me. Seems someone else besides me is using my credit to verify his credit.

OuterBeltway • August 4th, 2008 at 2:25 pm

@Gloomy:If only the SWFs would buy. But they probably won’t, at least until values drop a whole lot more. But either they buy in dollars now, or they hold dollars that are worth a lot less later. Not a great choice for them, and just as bad a choice for all the U.S.-based savers. —– separately —–I hear a lot of people wondering "where do I hide my money?" It may be that the logical choice is to invest it in some wealth-producing business (not a consumer-side play) somewhere around the world. Free Tibet said, over on LB’s thread, that there may be many economies around the world where there are people with fundamental needs (water, power, transportation, shelter, food) wherein existing technology can be re-applied (albeit with locale-specific design changes, if nec). Maybe he’s right. Maybe it’s time to make funding such investment opptys a bit easier.

Alessandro • August 4th, 2008 at 3:57 pm

Merrill Lynch CEO announces they are going to "raise more capital in two-weeks time"… No sorry, he said the firm is "very well capitalized"… at least for the next two weeks :) "Merrill’s Thain Won’t Rule Out Further WritedownsMerrill Lynch Chairman and CEO John Thain told CNBC that the brokerage firm is "very well capitalized" but didn’t rule out further writedowns if the value of risky assets continues to decline."No one knows what the market will look like in six months," Thain said in a live interview. "But today we have more than enough capital."Thain also said he didn’t plan to cut the dividend, saying Merrill Lynch " will shortly be back to profitability.""http://www.cnbc.com/id/26012987Seriously, how can those guys make such a fool of themselves?

Alessandro • August 4th, 2008 at 4:06 pm

I.O.U.S.A. looks like Buffett fears the biggest fire-sale in history is coming as our Professor."Warren Buffett On the Big Screen to Highlight An Inconvenient DebtWarren Buffett will participate in a live Omaha "town hall" event to be seen in hundreds of movie theaters across the nation, following the screening of a documentary movie that argues the U.S. is going broke.Its backers, notably Pete Peterson’s foundation, hope the film I.O.U.S.A. (tag line: "One Nation. Under Stress. In Debt.") will focus public opinion on America’s federal budget deficits and national debt the way Al Gore’s An Inconvenient Truth energized the "green" movement."http://www.cnbc.com/id/26001658

Guest • August 4th, 2008 at 4:23 pm

"Feel free to respond here or, maybe better, at outerbeltway at yahoo dot com."O.B.@ OuterBeltway on 2008-08-04 08:46:12You will find your answers in Eric Hoffer’s "The True Believer" and other works, if you consider that "consensus" is a group behaviour and does not equate to ANY individual beliefs, at all. That is to say, the group takes on its own form of belief system and as a consequence, behaviours.The ‘group’ always works for the group’s best interests, and never those of humanity or the individual!Consensual decision making and actioning is the greatest danger to humanity as it is a default sacrifice mechanism where the individual hands over his abilities and responsibilities to utilize his/her thought processes in exchange for ‘entertainment’ (such a TV News programs).Hence, any Institution works for that "Institution" and not for humanity or society, and or civilization and Banks follow the same rule. It is pure unadulterated physics. See LB Blog for a recent post on Central Banks – he / she is correct – we all know this, but why do we keep on eating the same poison that destroys us and our socio-economic system of aspired civilization building and humane achievement?Because, the fundamentals of our societal belief system and socio-economic systems are invalid!There are no conspiracies (nor aliens) – we just work for the "consensual institution" in blind and enjoyable (until it fails) ignorance. The enemy is within.I repeat:"No man can be trusted":A. This is humanity’s greatest strength – if acknowledged!B. Our denial of the above, is Man’s greatest weakness!PS. As we speak, Banks around the World continue to crumble and in turn be propped up by public funds; the process is a dynamic systemic collapse; it continues and will continue – everywhere; demographically speaking, of course.We remain in denial and there is one certainty and that is, our Authorities and Leadership will do all the wrong things, at the wrong time and for the wrong reasons and just make it all worse; far worse.Ho humPeter

Gloomy • August 4th, 2008 at 5:54 pm

@Alessandro"But today we have more than enough capital."Isn’t this just Thain’s way of telling us that he is going to raise more capital in 2 weeks?

Guest • August 4th, 2008 at 7:45 pm

"Many have noted that the “run” on IndyMac actually occurred after the FDIC had already seized the institution. None have gone further with this notion, however, noting that the “run” was more on the FDIC rather than IndyMac. Why would depositors run the FDIC? Largely because the FDIC has limited reserves of only $53 billion, backed by an additional $40 billion line of credit at the Treasury.While the FDIC announced that it only expects to face losses of some $4 to $8 billion at IndyMac, what’s the problem? The problem is that IndyMac’s insured deposits total some $26 billion, and the FDIC is laying out those funds now to cover depositors. Once the FDIC sells off IndyMac’s assets, it will eventually recover the remaining $18-$22 billion. Historical statistics show that the recovery will average about six years and proceed along a linear path, i.e., one-sixth per year."http://www.rgemonitor.com/financemarkets-monitor/253229/the_fdics_troubles_and_the_new_financial_architecture

Forensic economist • August 4th, 2008 at 8:07 pm

@ Guest:I don’t think that the depositors at IndyMac who lined up were fearfull that the FDIC was going bankrupt. I think that they were unsophisticated small depositors who had no idea whether or not their money was safe and were panicing. I would bet the depositors who lined up were barely aware of what the FDIC is, much less what its assets are.Which to me shows the need for a competently run FDIC: to protect the unsophisticated. The large checking account depositors – mainly corporations or public entitites — are presumably sophisticated enough to perform due diligence on the banks. Small depositors aren’t. As shown by their unnecessary lining up to get cash, small depositors can panic. Panic can snowball ruining solvent but illiquid institutions. So the FDIC not only protects the unsophisticated, it protects the institutions from the unsophisticated. The FDIC did a crappy job of protecting depositors (and taxpayers), but that’s another story.While the FDIC has limited resources, it, like Fannie, implicitly has the FF&C of the whole US government behind it. Remember, in 1993 the FSLIC was essentially bankrupt, but was not allowed to default.

Kafka • August 4th, 2008 at 8:40 pm

Recession, Depression, Recession, Depression, Recession, Depression, what is it gonna be and when is it gonna happen. The math is easy especially after Dr. Roubini has helped to make it so, though he was not the only one. The question is what is gonna happen and how do you make dough. Housing prices will fall another 15%, maybe, 30% possible, 50% doubtful. Commodities down another 10% maybe, down another 20% possible down another 30% doubtful. Financials, the numbers as far as main street is concerned are fake so the losses may likewise be fake, certainly the future business model is fake. What do you know for sure, the consumer comprises 70% of the economy and the consumer is screwed, $100 for a tank of gas and $8 for a fast food meal. Whatever the Fed does which will most likely be nothing since they have too much bad collateral on their books, will not impact the consumer because there is no more credit available to them. GDP is not real but even to falsely continue its increases, the kindness of foreigners will be necessary but it can not last. Reich says the majority is no better off than it was in the 70s based on the stats. If true, Obama wins and annual Trillion dollar deficits are in the offing (though it is doubtful McCain would be much better). Long term short the dollar and 10 year notes.

OuterBeltway • August 4th, 2008 at 11:08 pm

@PeterJB. Another drinking-from-the-firehose post. It takes me a long time to digest what you say. I’m tempted to discard it because I don’t really understand it, but that’s the easy way out. It takes real work to absorb what you set out.Thanks for making the effort, I hope you continue to do so.Now, you assert:* Institution works for institution, not individual or people. OK on that one, generally – you’re using caricature for effect, but I ack the point. * No man can be trusted. Tighten this, please. Do you mean "motives understood"? "behavior predicted?"? "agreement thoroughly articulated and subsequently honored?" What’s your definition of trust here?Are you making this point as a way of saying "all banking is broken, perforce as it is an institution". Or is the point a bit more nuanced, saying "banking can only work once one understands that no man can be trusted, and the operation/design of the banking relationships change to acknowledge that reality"?I don’t want to put words in your mouth. I have the feeling you’re conveying something vital – I read Eric Hoffer’s online quotes/excerpts enough to see the depth to this fellow, so I don’t want to walk by your point. You also said:We remain in denial and there is one certainty and that is, our Authorities and Leadership will do all the wrong things, at the wrong time and for the wrong reasons and just make it all worse; far worse.I’m OK with that one. I don’t see much daylight between our WS bankers and the government leaders. Same people, same ideas. I do see that the general public is in denial, and would prefer to remain that way, generally. And you also said:"Because, the fundamentals of our societal belief system and socio-economic systems are invalid!"That’s a biiiigggg stick, PeterJB, to lay on the table without supporting detail. The crowd eyes it like a loaded shotgun. Got any stories to go along with the artifact?Tks. O.B.

OuterBeltway • August 4th, 2008 at 11:24 pm

For those interested, here’s a typical quote from this fellow Eric Hoffer that PeterJB spoke about:"…summarizes the thesis of The True Believer: “Faith in a holy cause is to a considerable extent a substitute for the lost faith in ourselves.”Ponder that, mi amigos. Not your everyday slice of white bread.

Anonymous • August 5th, 2008 at 12:01 am

@O.B.:I don’t think the common man and woman wants to remain in denial. I think there is nothing they can do to protect themselves, so what the heck go to work try to pay the bills…No matter whom they vote for they’ll get the same treatment. They will not be permitted to avoid bailing out their betters.Damn this leadership!

Neophyte • August 5th, 2008 at 12:55 am

AfA: “Any prediction on what would be the effects of declining oil prices on banks, hedge funds and pensions by the end of Q3 if the current trend continue?”This is an interesting question as it raises so many underlying assumptions and theories about oil and supply/demand vs. speculation. If a manager thinks peak oil is real he/she will no doubt stay long in energy and oil. Yet even those familiar with peak oil probably balk today at the precipitous drop in oil stocks and thus think of exiting a losing position. I see oil dropping potentially to below $100 a barrel before it resumes it spectacular climb to $200 to $300 a barrel. Far out? Not at all. The data consistently shows that we reached peak in 2005 and are producing less each year while demand grows worldwide every year. The situation is indeed quite dire, if not grim, in that declining oil production will drastically affect food and fertilizer and everything else. I believe what we saw in oil prices this year was just a warm up to the real event, the end of the plateau and the beginning of the decline. Drastic conservation is needed now, but instead of addressing the real problem Congress yammers about speculation in the oil markets and the big evil oil companies who are making a profit. Something that occurred to me today is that things are not as bad as we thought. Things will not be as bad as we think. Things today are worse than we thought, and our idea of future problems in oil will be dwarfed by the reality of how bad it will actually be–unless we address the problem of oil depletion immediately. I have been reading CR and this blog for several months and never would have predicted that the general economy could spiral into debt and credit destruction as rapidly as it has this year alone; I don’t believe that even Roubini foresaw just how bad it would become, and I believe even he remains unwittingly positive. Meredith Whitney brought up the great point (on CNBC last week) that if home prices fell 30 percent total, which so many predict, that we would still be at close to peak prices in valuation, i.e., homes will still be unaffordable. Affordability requires a 50 to 60 percent decline in home values at least. And as pointed out above, at that drop, we have the effective real death of the U.S. economy. So just as I now think that the housing bust will be worse than what we could have imagined, I also think that the rapid decline of oil imports to the United States will also be much worse than even the most seriously concerned "doomers" envision. (Sorry SWK!) A few people stand to profit by staying in oil to a certain top, determined beforehand (say, to $250 a barrel). Then I think it would be smart to exit oil and get into alternative energies, if in fact you haven’t already done that. Funds and pensions will need to do the same if they hope to make a profit of some kind in this quickly deteriorating market. Of course, there is always gold as well, but to me, it is risky because the government will no doubt interfere in this market, just as it has interfered in shorting financials…

goldorcash • August 5th, 2008 at 1:22 am

"Obama wins and annual Trillion dollar deficits are in the offing (though it is doubtful McCain would be much better). "Written by Kafka on 2008-08-04 20:40:33I don’t think you should assume a democrat will lead to bigger deficits. Remember Clinton left office with a surplus. I think you can be fairly sure taxes would be raised on the very rich, but that is overdue.

goldorcash • August 5th, 2008 at 1:32 am

"Of course, there is always gold as well, but to me, it is risky because the government will no doubt interfere in this market, just as it has interfered in shorting financials…"Written by Neophyte on 2008-08-05 00:55:30This is so true. It is making me rethink where to safely put assets. If I post in the future as "windorsolar" you will know I have made a big change!

kilgores • August 5th, 2008 at 2:31 am

@ neophyte 00:55:30The question of whether peak oil is here already is the wildcard in all this. I remember in the 1970s everyone saying we were running out, but we weren’t quite there. If we are there now, that really could portend disaster for the U.S. and every other country in the world. Too precipitous and rapid a decline in gasoline, for instance, could lead to a virtual arrest of the economic system, starvation, and political anarchy, a future too terrible to contemplate.SWK

Guest • August 5th, 2008 at 2:59 am

SWK"I remember in the 1970s everyone saying we were running out, but we weren’t quite there"US did ran out of oil (no its not total depletion..but the oilfield is producing less and less and you can see that effect on US foreign policy) yesterday Indonesia announced they only have 10 years of oil to pump out, that’s insane, they are suffering shortages now, imagine what will happen if they totally ran out (domestic production), yup they can export but who have the cash to buy it (puff… there goes those oil subsidies),only the rich guy..that is why (the inglorious waiting of a) crash in stock market is nothing compared to what we have to deal with in the next 1-5 years, you can create money but you cant print OilThe clock is ticking..

AfA • August 5th, 2008 at 3:28 am

Written by Guest on 2008-08-04 14:14:40Written by Neophyte on 2008-08-05 00:55:30Thanks to both for your contributions.Although people talk a lot about peak oil, and regardless whether the story is true or not, I believe that it is not priced in (even at $150). There is a lack of data (coupled probably with disinformation) about proved and unproved reserves, production, shipment, stocks, black markets that you cannot find two oil analysts agreeing to the same numbers. I am not disregarding the possibility/imminence of peak oil, I just believe that the prices were primarily driven by exogenous factors (dollar, currency and inflation hedging, liquidity smuggling by PDs, geopolitical and weather factors …) I am not disregarding either any manipulation of prices, liquidity or news flow, but I believe that prices CAN still go down farther because of demand destruction (or to be more accurate the belief of oil market players in demand destruction) and the easing/acceleration of the exogenous factors mentioned above would dictate short term prices. If oil "market makers" were aware/accrediting the peak oil story I don’t believe prices would stay that low for so long time (yes $150 is low and 6 months is long).I was specifically asking about pensions, hedge funds and banks who are not really oil savvy or knowledgeable in commodity markets but were driven or forced to significantly speculinvest in the oil markets and who were argued to be “moving” the prices and trading on technical analysis (if we can call a bubble formation technical analysis). If the prices are to continue to suppress pensions will feel a lot of additional pain in the as… in the books (to be added to catastrophic mortgage paper related investments) And banks may also show additional losses on one of the last fronts that was providing some relief during the last months. I just happen not to have data or more confirmed information. I doubt none of these speculators have any confirmed knowledge about the peak oil story, so for them there is no reason to hold on to long term contract if, again, their technical analysis give a red warning with a sell sell sell notice. However, as opposed to smelly papers that can be hidden inside the books, actual losses from mark-to-market futures contracts are immediately realized and accounted for, leading to immediate pain (well, unless Wall Street turns its magic hat and … abracadabra … turns paper losses into assets that can sell)

Octavio Richetta • August 5th, 2008 at 4:59 am

Don’t miss Malldin’s latest:Survival of the Unfittestby Michael Lewitt"Can we doubt (remembering that many more individuals are born than can possibly survive) that individuals having any advantage, however slight, over others would have the best chance of surviving and procreating their kind? On the other hand, we may feel sure that any variation in the least degree injurious would be rigidly destroyed. This preservation of favourable individual differences and variations, and the destruction of those which are injurious, I have called Natural Selection, or the Survival of the Fittest."- Charles Darwin, The Origin of Species (1859)Honest to God, HCM is trying to find the light at the end of the dark tunnel that the U.S. economy and financial markets have become. But every time we turn around, regulators and other power brokers continue to avoid making the hard choices necessary to deal with the problems at hand. As a result, the practices that led the current credit crisis are being preserved, and changes that could lead to more stable and healthy markets are being pushed into the future (perhaps forever). The last month has provided so much grist for this mill that we hardly know where to begin, but begin we must. Our survey of what can only be described as a regulatory wasteland begins with the SEC’s misbegotten short-selling legislation….http://www.investorsinsight.com:80/blogs/john_mauldins_outside_the_box/archive/2008/08/04/survival-of-the-unfittest.aspx

Anonymous • August 5th, 2008 at 7:14 am

On nationalised mortgage companies:Northern Rock , with 100bn GBP (200bn US) in assets , now nationlised has required a 3bn GBP (6bn US, 3%of assets) capital injection by the Bank of England. Capital comes via converting senior secured debt to equity. Fannie & Freddie , with 25 times the assets , now nationalised via the Housing Bill will require at maximum 25bn USD (0.5% of assets) of tax payers bailout money/equity.UK house price declines are lagging the US by some marginUK deliquencies are lagging the US by some marginDo they really need 150bn immediately , and then some for being deeper in the mire than the UK is (yet….)Total bailout 300bn + ?

Play On • August 5th, 2008 at 7:54 am

OPEC is controlling prices forget peak oil!Point 1In the 70s OPEC produced 30 mil bpd. Today OPEC produces 32 bpd. Non-OPEC oil prodcution has doubled since the 70s but OPEC production has increased 6% in 35 years!Point 2Read the BW article this wekk re the TNK-BP dispute in Russia. Seems the British want to reinvest profits in R&D and the Russkies DONT! For nefarious reasons probably, now that Putin is the world richest man.Point 3Production is being held down by dumb lack of reinvestment in Mexico and Venezuela.

Greg • August 5th, 2008 at 8:07 am

I was listening to CNBC this morning on the way to work at about 7:45. The talking heads on there were discussing housing and the one guy said that some people are saying that we are only in the 2nd inning of the housing crisis. Another asked who is saying that and the 1st guy responds Roubini. The 2nd guy says in a very sarcastic manner, "Oh, 2 trillion Roubini".I was thinking to myself, NR has been dead on with the housing and economy for the 2 years I have been reading his blog (making/saving me a lot of $)… I wonder how well that talking head has been at predicting this debacle, because it is usually "rah, rah, rah, the economy is great" on CNBC.

Flanders • August 5th, 2008 at 9:04 am

Mark Mobius Says Fed Should Cut Overnight Bank Rate to 1% to Boost Economy.I’ve been listening to this fruitcake since January and he hasn’t made a single correct prediction. According to him, the credit crisis would already be over in January, afterwards, it would be over in March. He favored emerging stock markets, which has been plumbing. Delusional and clueless. How does this guy ended up managing so much money? Anyone?

Anonymous • August 5th, 2008 at 9:29 am

Can somebody explain why Syron at Freddie Mac is not being charged with Fraud on the Treasury with the on the record comments of his underlings. If I file bankruptcy after charging $1,000,000 in credit card debt and the creditor files a motion in bankruptcy court and later proves on the record that I intentionally intended to defraud the creditor,I would be referred to U.S.District Court and subsequently prosecuted for fraud. This is intentional misrepresentation of material facts intended to induce others to act in reliance and that in fact caused the creditor monetary losses.If you are touting that your private company Freddie Mac is guaranteed by the Treasury and that is not legally true.Subsequently you in fact act with extreme reckless improvident lending with knowledge that this lending is very likely to default, but who cares you are making money and Treasury will be extorted to bail you out to prevent Systemic Risk. Are you not committing fraud on the Treasury? Or could the lack of action against him be related to the fact that the whole Financial establishment was doing pretty much the same. Is this the greatest cummulative and coordinated Bank Robbery in the history of the World?

Guest • August 5th, 2008 at 10:50 am

So why are stocks up aso much today? Oil entering a bear market is on one hand bullish, but on the other confrims the global recession….11:44 a.m.Archer Daniels Midland’s fourth-quarter profit falls 61%11:32 a.m.P&G sees higher costs as profit leaps 33%11:31 a.m.Clean energy funding jumps to record $5.8 bln

bytheway • August 5th, 2008 at 11:04 am

Today Mobius(some idiots call him "Indiana Jones" maybe because as this hero he dont think about what he is doin) said Russia is chaep but nobody would listen.Russian hookers are cheap but the market?

Guest • August 5th, 2008 at 11:15 am

"I don’t think you should assume a democrat will lead to bigger deficits. Remember Clinton left office with asurplus"ever heard past performance doesn’t guarantee future return? bottom-line, Obama is a retard and will bankrupt America with bailouts, free check rebate, huge public program that government cant afford, and hugest deficit and public debt.

Neophyte • August 5th, 2008 at 11:33 am

"I was specifically asking about pensions, hedge funds and banks who are not really oil savvy or knowledgeable in commodity markets but …. who were argued to be ‘moving’ the prices and trading on technical analysis…."AfA, I really am an economic neophyte, so I can’t speak to how fund managers might now react to plummeting crude oil prices. However, Congressional warnings about exuberant speculation in energy markets by large fund managers struck me as rather preposterous. It’s hard to imagine Congress grilling the directors of TIA-CREFF, Vanguard, or Fidelity about energy stock distributions without further disaffecting already incredulous American investors who have watched their non-energy portfolios spiral inexorably downward the past year.

Guest • August 5th, 2008 at 11:44 am

CLINTON DID NOT PRODUCE A BUDGET SURPLUS! HE AND HIS ADVISORS FIGURED OUT THAT IF YOU LIED ABOUT THEL LEVEL OF INFLATION (UNDERSTATE IT) YOU COULD CUT ENTITLEMENT COST OF LIVING BENEFITS IN HALF, THUS IT WAS A FICTITIOUS ACCOUNTING SURPLUS DUE TO HEDONIC PRICE ADJUSTMENTS AND RETARDED HOUSING ASSUMPTIONS IN THE CPI. ONCE AGAIN THE US TAXPAYER GETS SCREWED BY POLITICIANS!

Guest • August 5th, 2008 at 11:45 am

Indonesia’s central bank hikes rates to 9% By Polya LesovaLast update: 12:38 p.m. EDT Aug. 5, 2008

Guest • August 5th, 2008 at 12:02 pm

Sy Hersch on Cheney’s Casus BelliIn January I wrote about the phony Iranian Speedboat incident that got Fox news and the Bush propaganda machine all riled up for a couple of days. Last week at a conference The New Yorker’s Sy Hersch revealed that after this incident, Cheney held a “lessons learned” meeting because he was impressed how quickly the establishment press had been able to escalate the incident into a cause for war. If it hadn’t been quickly debunked by the local Navy Commander, Cheney felt they might have been able to escalate it into the Casus Belli, they had been looking for. One of the suggestions in the meeting was to make some PT boats that looked like the Iranian boats and outfit them with Navy Seals dressed as threatening Iranians. The idea was dropped because Americans killing Americans to start a war against Iran might have not been appreciated by the public if it was revealed.OMG–Cheney and Addington need to be stopped before they start a war. Here’s the video of Hersch.http://jtaplin.wordpress.com/Reminds me at Sender Gleiwitz.Damn, we got Hitler(Eichmann) you got Cheney.Lets see what will happen before the elections.

Kafka • August 5th, 2008 at 12:06 pm

Well it depends if you believe Clinton’s numbers (I don’t) but Obama aint no Clinton anyways. Obama will be faced with massive government spending promised to his constituents and the mess in the Middle East which can only get worse with Iran for which the U.S. seems to be baring all the costs. Trillion dollar annual deficts will result and rates will rise regardless of what the Fed does, there is a reason Gross is short bonds now and supporting Obama (not that things would be any better under McCain and perhaps worse).

Guest • August 5th, 2008 at 12:13 pm

I can’t believe the lack of discussion on the miraculous fall in oil the week before the Fed meeting! This instantly give teh Fed reason to pause on rate hikes and actually gives all US taxpayers an "easing" without the Fed having to ease and collapse the dollar-genious eh?

Average Jane • August 5th, 2008 at 12:14 pm

@ Oil Supply, generally.A caller to a radio talk show I was listening to yesterday posited the following question: "If there is a shortage of crude [for gasoline], then why aren’t there lines at the pumps?" Anyone care to answer that?

kilgores • August 5th, 2008 at 12:29 pm

@ Average Jane on 2008-08-05 12:14:05There are no lines because the price rises with the shortage of supply, and demand falls back. Unlike the 1970s, when price controls on gasoline kept demand artificially high and caused gas supplies to run out, the market is today setting whatever price point results from the intersection of supply and demand.Does that make sense?SWK

Guest • August 5th, 2008 at 12:50 pm

Depression – Totally unavoidable. Bank on it. Well . . . you won’t be able to bank on it, but you can bet on it. We are not only headed for a Depression, but a violent Depression that will be far worse than 1929. Some experts believe the United States will fall into the chaos, bedlam and anarchy that tore apart Yugoslovia. I am not going that far, but I know our morals and ethics are not the same as they were in 1929. Moreover, we are a far more violent society and totally dependent upon a well oiled system for delivery of food and basic services.http://realestateandhousing2.blogspot.com/

Guest • August 5th, 2008 at 12:52 pm

ISM number not that bad, is NR’s doomsday call still valid? oil down, less inflation, talk about headline inflation comming down to match core inflation, Fed keep rate low for a long time —> bullish for stock.

Guest • August 5th, 2008 at 12:53 pm

"If there is a shortage of crude [for gasoline], then why aren’t there lines at the pumps?" Anyone care to answer that?"if there is a shortage of crude, then why is oil pirce comming down? all points to bullish for stock.

Guest • August 5th, 2008 at 1:12 pm

bailouts:seems like USA is becoming more like China each day. That is nationalizing every failed industries. banking, financing, investment, auto, airline, and what else to come?

Guest • August 5th, 2008 at 1:16 pm

weak statement about inflation from FED. i am supprised gold and oil are down with weak stance on inflation from FED.

Anonymous • August 5th, 2008 at 1:20 pm

Morals weren’t all that big in 1929 either. Ever hear of flappers?This period is not the same. Debt cannot lead as directly to deflation, because of world prices for many commodities. There was world trade then too but it was less pervasive and did not include the major US transportation and heating fuel (then coal I think, now oil).Irving Fischer says the way out is inflation. We’re getting inflation more easily because of the lesser deflationary tendencies. So the feedback loop he describes won’t happen the same way.Due again to world markets, unemployment could go up faster, or at least differently. Or it could recover as the dollar devalues and US workers become cheaper on the world scale. There is probably less the government can do to help, other than inflate, because of the international economy.On the contrary the US government itself is hurt more: as the US becomes weaker, everyone else starts picking on us. Back in the 30′s they had National Socialism to worry about, now they don’t.

AfA • August 5th, 2008 at 1:55 pm

Leaked discussion at the FOMC (sorry Alessandro for the plagiarism)"We are slashing the benchmark interest rate to 2% … But we are already at 2% … Oh, really? Since when? Whatever, we stay pat then, what do you say folks?"

Alessandro • August 5th, 2008 at 2:05 pm

So $25bn for Fannie and Freddie, $25bn for GM and Ford…Hey, Hank! This bailout fashion looks cute, I and my wife would die to one, where do we apply? We would sure put our $25bn to good use!

tutterfrut • August 5th, 2008 at 2:06 pm

At the FOMC…Whatever, we stay pat then, what do you say folks? Oh yeah, and Fisher, you’re the dissent, you’re for a hike. Write it down somewhere, don’t forget, HIKE!

JLarkin • August 5th, 2008 at 2:33 pm

Pretty strong moves up; must be lots of bulls still out there falling into the value trap. Seems like a no-brainer to short these.Wachovia Corp. (WB:Wachovia Corp3:25pm 08/05/2008WB 18.99, +1.88, +11.0%) was another strong performer Tuesday, as the bank held on to its gains of 8%. The Wall Street Journal reported Tuesday that CEO Robert Steel indicated to Wall Street analysts the day before there will be no more shake-ups in its executive team and said he didn’t think the company needed to raise new capital. Shares of American International Group (AIG:American International Group, Inc3:25pm 08/05/2008AIG 29.43, +2.74, +10.3%) added 7% at last check, after it was upgraded to buy from neutral by UBS. The broker said its upgrade on the insurer came "warts and all," and its call was on valuation. Meanwhile, Lehman Brothers (LEH:Lehman Brothers Holdings Inc3:25pm 08/05/2008LEH 19.95, +2.01, +11.2%) shares also rose 6.6% on speculation from CNBC that it is mulling the sale of its entire investment management unit, including its Neuberger & Berman asset management unit. The rise in U.S. financials comes against the backdrop of poor banking results out of Europe. HSBC, Northern Rock and Societe Generale all reported lower earnings and big write-downs over the last two days.

Guest • August 5th, 2008 at 2:34 pm

At the FOMCBernanke: I’ve found my belly button!Others: Show us. [pause while they all stare intently at BB] You moron that’s your A hole!!Bernanke: Really? I’ll look some more.

Guest • August 5th, 2008 at 2:51 pm

WHAT IS GOING ON WITH US STOCKS??? THE FED DECISION WAS HARDLY WORTH 400 POINTS TO THE UPSIDE!! Miss America-your take?

GLOOMY • August 5th, 2008 at 2:57 pm

MEANWHILE, REALITY REARS ITS UGLY HEAD"Behind the reassuring statements from Paulson and others that the "worst is over" the reality of the credit collapse since August 2007 is a deepening economic contraction which I have said several times in this space will surpass the Great Depression of the 1929-1938 period. A good friend who is an unemployed homebuilder in a prosperous part of Arizona just sent me the following list of US department retail store closures. It is worth noting that over 70% of the US GDP is consumer spending and that the entire Federal Reserve strategy of Alan Greenspan after the March 2000 collapse of the stock market bubble, was to bring US interest rates to their lowest levels since the 1930’s in order to stimulate consumer spending on credit, i.e. debt, to avoid "recession." Note the scale of the following store closings across America in recent weeks:Ann Taylor closing 117 stores nationwide.Eddie Bauer to close more stores after closing 27 stores in the first quarter.Cache, a women’s retailer is closing 20 to 23 stores this year.Lane Bryant, Fashion Bug, Catherines closing 150 stores nationwide Talbots, J. Jill closing stores. Talbots will close all 78 of its kids and men’s stores plus another 22 underperforming stores. The 22 stores will be a mix of Talbots women’s and J. Jill.Gap Inc. closing 85 storesFoot Locker to close 140 storesWickes Furniture is going out of business and closing all of its stores. The 37-year-old retailer that targets middle-income customers, filed for bankruptcy protection last month.Levitz – the furniture retailer, announced it was going out of business and closing all 76 of its stores in December. The retailer dates back to 1910.Zales, Piercing Pagoda plans to close 82 stores by July 31 followed by closing another 23 underperforming stores. Disney Store owner has the right to close 98 stores.Home Depot store closings 15 of them amid a slumping US economy and housing market. The move will affect 1,300 employees. It is the first time the world’s largest home improvement store chain has ever closed a flagship store.CompUSA (CLOSED).Macy’s – 9 stores closedMovie Gallery – video rental company plans to close 400 of 3,500 Movie Galleryand Hollywood Video stores in addition to the 520 locations the video rentalchain closed last fall as part of bankruptcy.Pacific Sunwear – 153 Demo stores closingPep Boys – 33 stores of auto parts supplier closingSprint Nextel – 125 retail locations to close with 4,000 employees following 5,000 layoffs last year.J. C. Penney, Lowe’s and Office Depot are all scaling backEthan Allen Interiors: plans to close 12 of 300 stores to cut costs.Wilsons the Leather Experts – closing 158 storesBombay Company: to close all 384 U.S.-based Bombay Company stores.Dillard’s Inc. will close another six stores this year. "http://www.globalresearch.ca/index.php?context=va&aid=9728

Softwarengineer • August 5th, 2008 at 3:05 pm

WE’RE IN DENIAL?How much laundered money leaves America each year? Its impossible to track when its backpacks of cash illegally leaving our country.My humble guess, it’s at least equal to the cost of the Iraq War, especially if you factor in lost business churning of the money, had it stayed in America. By the way, the latest media/bank wild estimate of laundered money leaving America is just $24Billion a year….lol

Guest • August 5th, 2008 at 3:06 pm

Nice headlines to ease the fear…Dow adds 330 pointsIt’s the biggest one-day point gain since April 1, S&P’s up almost 2%

GLOOMY • August 5th, 2008 at 3:07 pm

DON’T PAY ATTENTION TO THAT MAN BEHIND THE CURTAINWall Street cheers the drop in oil prices, not realizing it is a harbinger of coming misery. Demand destruction is bad news for the economy and corporate profits. It never ceases to amaze me how "investors" never think beyond the most superficial headline. The rally will be temporary and before long accelerating bank failures and plummeting corporate profits will take the wheel and drive this market off the cliff and onto the rocks below.

AfA • August 5th, 2008 at 3:17 pm

Leaked FOMC release:"The Fraternity of Market Manipulators decided today to keep its target for the federal funds rate at 2 tries per cent hoping we won’t miss the target again [suffocated laugh]."The economy is expanding [loud laugh] and the sheeple …oops… inflation is under control [sic] ….ssshhh, good boy."Yes, and Santa Clause [yes another sic] will come this Christmas before Christmas on a unicorn with $25B bag and T-bag presents. The ones marked with a Bee are dedicated from Bernanke and the ones with a Tea-leave on them are from the Treasury. Frankenstein’s monster would join the X-men to fight against zombies. Oh, and Nietzsche and the Pope are the same person. And Irving lives, hey Fisher! … Come here to tell them the joke about the minister and the prostitute … Don’t be shy! … What about the Deaf’s one?No, it is called the def … defl … deflat … whatever, it is the story of Def, Fat, Flat and Elation and someone borrowed money from someone else but I don’t remember … all I remember is that they all end up in the same doubt bed …eh … bid depth … eh … bad debt?? [runs away while crying and shouting] … 2 tries ain’t enuf for me."Hmmm. Oh, we forgot: the Santa Clause, which stipulates we save any member of our Fraternity, is soon to run out of presents and needs your contributions [now I am real sick]"

Guest • August 5th, 2008 at 3:40 pm

Tried to short this ridiculous bear squeeze/FED day-trade debacle. FIVE times I tried to enter the market at separate times during day with short sell requests. FIVE times denied and rejected with "No shares presently available". Remove the ability to short on these ridiculous moves and they can take stocks to any height that they want. What news? None. Commodity bubbles bursting, of course, it was always and ever manipulationTHE RIPPLES ARE GETTING VERY BIG! WE ARE SEEING YEARLY ASPIRATIONAL PERCENTAGE MOVES IN EACH DIRECTION DAY-TO-DAY. IT IS ROULETTE WHEEL TRADING, BLACK, RED, RED, BLACK WITH HIGH SINGLE-DIGIT PERCENTAGE MOVES. WOW!

Miss America • August 5th, 2008 at 4:03 pm

@ Allesandro… Hat tip. Loved your idea. I stole it and tried to entertain myself for a few minutes. Hope you enjoy:…more “leaked” FOMC minutes:Timothy F. Geithner: – Hey Spanky… Can we get this meeting started!?!?! I got a “thing” at 2pm.Ben S. Bernanke: – Tim, would you please stop calling me Spanky. We’ll get this started once Kroszner and Mishkin get back from the bathroom.Sandra Pianalto: - Do those 2 always go to the bathroom together?Timothy F. Geithner:– Yep. Kinda weird ain’t it. Sorta like that smell commin from Fish face. Richard W. Fisher:– Tim, would you grow up?Timothy F. Geithner:– What’s a matter dicky boy??? Did someone pee in your Cheerios? You and Spanky need to lighten up a bit.Ben S. Bernanke: – Tim… stop calling me Spanky!!!Charles I. Plosser:– Does anybody have any duck sauce? I got an egg roll… and no duck sauce! Hey Stern, I hope you didn’t give the delivery boy a good tip.Gary H. Stern:– Ha, I tipped him alright… I told him to short the dollar. …and then I shorted him a dollar. Timothy F. Geithner: – Stern, you cheap bastard. Gary H. Stern: – I got bridges to pay for:Timothy F. Geithner: – Issue some Auction rate bonds and have Spanky fire up the copter.Ben S. Bernanke: – Timmy!!! I swear… 1 more time… (Kroszner and Miskin walk in) Donald L. Kohn: – Hey nice of you 2 to show up.Frederic S. Mishkin:– I vote the same as whatever I voted for last time.Randall S. Kroszner:– I vote with Mish.Timothy F. Geithner: – That’s a shocker!Ben S. Bernanke: – OK, Mish and Krosz vote for “sounding tough, but not doing anything”Charles I. Plosser: – Hey Mish, are you gonna eat that pickle?Timothy F. Geithner: – Charles… You don’t know where that pickles been! (leans in and wispers) …besides, Mish and Krosz never was their hands after going to the bathroom. I watched them last week. Disgusting! I refuse to shake their hands!Kevin M Warsh: – Can I vote for “doing nothing, and sounding tough”Ben S. Bernanke: – but that’s the same thing?Kevin M Warsh – No it isn’t… It’s the opposite.Ben S. Bernanke: – It’s not the opposite!!! It’s the exact same!Timothy F. Geithner: – Hey Spanky, I think Warsh is right. Sounds pretty opposite to me.Charles I. Plosser:– Can I change my vote?Ben S. Bernanke: – Charles, you haven’t voted yet.Charles I. Plosser:– I voted for Chinese. …but now I think I want pizza. Richard W. Fisher: – I want Pizza too.Frederic S. Mishkin:– I vote PizzaRandall S. Kroszner: – Me too.Timothy F. Geithner: – Again… shocker!Sandra Pianalto: – Timmy, do they do everything together?Timothy F. Geithner: – Ask Spanky.Ben S. Bernanke: – That does it Timmy! It’s go time!Timothy F. Geithner: – Hold on Ben (cell phone rings) “yeah… uh huh… Buy. OK… …and sell short on the dollar… but do it in my other account… Yeah, the Cayman one…”Timothy F. Geithner: – Sorry Ben where were we… Ben…. Ben…? Where’d Ben go?Richard W. Fisher:– He had to meet with the press. I guess we’re staying put?Timothy F. Geithner: – “staying put”??? Not me… I gotta meet up with Spitzer. See ya next month boys.Miss America.p.s. Miss Italy. Have you sold yet?

Guest • August 5th, 2008 at 4:24 pm

@ OuterBeltway on 2008-08-04 23:24:25"…summarizes the thesis of The True Believer: “Faith in a holy cause is to a considerable extent a substitute for the lost faith in ourselves.”Sounds like you have your answers?"Now, you assert:* No man can be trusted. Tighten this, please. Do you mean "motives understood"? "behavior predicted?"? "agreement thoroughly articulated and subsequently honored?" What’s your definition of trust here?The behaviours of man must, a priori, be founded in physics, in fact they are! Therefore, the only circumstances where the non-trust bit fits into this equation, is where man is unique and individual ("a Sun unto himself"). That is to say, man is not a domestic animal to be bound (bind – religio) by ideologies and religious quackery; Man is a potential life form of the wild, only subjected to the Laws of Physics (both Universal and Parochial). Man is true only to himself when the circumstances dictate. And, that is to say, when man thinks of himself. When he does not think of himself, is when he trusts which is not being sentient; which he is supposed to be!This is a "fundamental" which we choose to deny in favour of religious fruitcakes who defined as misery, love company.Since Roman times religion has been developed to control man by those that would be King and then ideologies have been introduced as refinements and you know where that has got us.I am stating that the whole of our socio-economic foundation must, a priori, be founded in physics; SOoo, Yes.The Banking system is unstable because it is founded on the assumption that Bankers are beyond God when it comes to integrity. Bankers are the ones with the lowest of integrity because they most easily become corrupted by power (another story), then they hoard, lie and shut down the system, as you can see.The structure of the Banking system is untenable and only serves the political and bureaucratic elite; the last you need it to serve.And you also said:"Because, the fundamentals of our societal belief system and socio-economic systems are invalid!"That’s a biiiigggg stick, PeterJB, to lay on the table without supporting detail. The crowd eyes it like a loaded shotgun.Got any stories to go along with the artifact?They are invalid because the fundamentals of human behaviour are based on invalid assumptions and assumptions get you killed and maimed.I answer with a question, if I may: Do you trust George W Bush and all that hangs off him? To do the right thing for "most of the people", or do you believe that he will look after himself first and then his team second? How about Hank? And then , poor, poor Ben? Ben is going down as the caretaker of the biggest socio-economic power-collapse in the World’s history, sooo, is he really thinking about you? Are all his energies thinking of you?Of course not! Such behaviour is in accord with reality or physics – and expected er predictable.Hank is a man of the Institution; he can’t think nor act without consensual support and I say that Ben as an academic, is dishonest; perhaps not by intent but due to those academic institutions from where he has come; dishonesty in the global academic community at large is a priesthood and a den of vipers; I speak generally. Ben has no experience of economics in the real World.The fundamentals of our World today are founded on groups, institutions, corporations, love, and the fact that you can trust all plus your government: This is proven and clear to be hogwash.The fundamentals of our socio-economic system need to be founded in physics, which man are a functioning part.Ho humPeterJB

Guest • August 5th, 2008 at 4:29 pm

http://www.interfluidity.com/archives/archive_2008_07.shtmlThe great credit crisis of 2007-2008 is slouching towards its Bethlehem, a full faith and credit crisis for the United States of America. This die was cast at the first TAF auction, when the Fed chose to pull private credit risk onto taxpayers’ already strained balance sheet, rather than endure any unpleasantness. Covered bonds may prove to be a success with investors. But, careful what you wish for. The more banks sell, the more we’re all on the hook, if the loans go bad. Covered bonds issued by "too big to fail" banks are basically equivalent to mortgage backed securities guaranteed by Fannie and Freddie. It’s just another way of putting private-sector bells and whistles on a public sector assumption of risk.These bonds are seen as a way of "unfreezing the housing market". The housing market seems frozen because in many areas, relationships between home prices, rents, and incomes are still out of whack. Assuming relatively stable rents and incomes (bad assumption, I know), mortgages in "stuck" markets made at or near current asking prices are likely bad investments. That suggests the implicit taxpayer guarantee won’t expire unused. The more covered bonds are sold, the more extreme measures or hidden subsidies will be required to prevent household names from failing.

Guest • August 5th, 2008 at 4:37 pm

Talking of lost opportunity:ML’s mortgage under-written write down of 78% suggests a house price writedown of 78% and as one man’s debt can be another man’s asset, why don’t we see the opportunity here? After all, the write-downs are occurring in a dynamic sense anyway, so why not bite the bullet and rewrite all those mortgages at less ~50% – everyone wins (subject to conditions)As far as the NINJA loans goes, I received an email from a friend who walked away (via jingle mail)from a USD600,000 mortgage and relocated overseas with family (and the same company) and bought another house there. He says it made economic sense. SOooo don’t be too quick to judge.Seriously speaking apart from the trust angle, the US housing dilemma appears now to be *technically* fixable.Ho humPeterJB

Guest • August 5th, 2008 at 4:49 pm

@Greg: “I was listening to CNBC this morning on the way to work at about 7:45. The talking heads on there were discussing housing and the one guy said that some people are saying that we are only in the 2nd inning of the housing crisis. Another asked who is saying that and the 1st guy responds Roubini. The 2nd guy says in a very sarcastic manner, ‘Oh, 2 trillion Roubini’.”Roubini is getting to be a household name, apparently so big a household name that the enemy has to propagandize against him.

Alessandro • August 5th, 2008 at 5:11 pm

Anybody willing to bet when "$2 trillion Roubini" will up is ante?The stream of bad news about Alt-A and prime mortgages, HELOC, credit card debt, commercial real estate, bank runs, etc is taking up volume.I’ll go with a "$4 trillion as a ceiling" before the end of the year.

GLOOMY • August 5th, 2008 at 5:17 pm

SOME HUMOR TO LIGHTEN THINGS UP A BITAug. 5 (Bloomberg) — The U.S. Treasury today said it hired Morgan Stanley to study the department’s new authority over Fannie Mae and Freddie Mac, the country’s two largest sources of mortgage financing. “We have no plans to utilize the temporary authorities,” the Treasury said in a statement released in Washington. “This action should be interpreted as a prudent preparedness measure, and nothing more.”

Miss Italy • August 5th, 2008 at 5:17 pm

@Miss Americasold most of them. Still trading at 1% below offer price, so I’m keeping some to see what happens. Anyway made almost 7% without any risk. Nice ride. I trusted you so much that I actually borrowed money to buy the stocks.Thanks again. The offer for the dinner is still valid.Please get back to us with more of those suggestions.Miss Italy

Gloomy • August 5th, 2008 at 5:31 pm

WHERE IS THE TIPPING POINT?The automaker bailout is happening more quickly than I anticipated (http://globaleconomicanalysis.blogspot.com/2008/08/default-risk-on-gm-ford-chrysler-hits.html). You can bet that by the end of the year we will be writing Fannie and Freddie checks big time. And surely the FDIC will need a bailout in the next few months. How long will it be until the end game, when concern over the quality of US debt causes dollar and interest rate breakdowns?

Alessandro • August 5th, 2008 at 5:39 pm

@AfA about money creationa sharp co-worker of mine forced me to elaborate on our discussion.One of the thing to keep in mind is to not equate deflation and recession/depression. Since we agree that inflation and deflation are purely monetary phenomena we can certainly imagine a time then the economy is crap, but the banking system is not, so that the CB can print all the dollars it wants (someone else would call it stagflation).In particular while variations of the money supply affect the real value of assets and liabilities, it doesn’t affect directly the production cycle: a field can produce the same amount of corn, an assembly line can produce the same amount of cars employing the same amount of workers, software developers write the same amount of code.The problem with (unexpected) variations of the money supply is that mid- and long-term "contracts" change (unexpectedly) in real value. For a business this can be a problem or a benefit depending on the variation, but the randomness of the process in aggregate lowers the productivity of the economy (some of the dumb business get rewarded and some of the good business get punished, randomly).My thesis is that deflation in and of itself has no worse effect that inflation on a system.On the other hand get an economy that whose productivity is stagnant or decreasing for example due to wild looting by government, bureaucrats and banks that suppresses entrepreneurship and only sponsor corporatism (think today’s Italy). How exactly printing (or not printing) more money would help increasing productivity? We tried like mad in Italy, to the point that the smaller banknote denomination was 1.000 lire, but strangely printing doesn’t produce wealth, it just transfer it from the hands of the producers to the hands of the ones that print.Obviously when a debt orgy finally collapse you get deflation and depression and they feed one into the other and you get the dreaded deflationary spiral. But it is useful to think the two distinct, one is a monetary phenomenon the other is economic.My thesis is that forced savings have fueled the debt bubble and have set the stage of the recession/depression, while the banking system speculating into all debt related "assets" as set the stage for the deflation. If the banking system had securitized all the crap and sold all of it, we would have had a recession/depression sans deflation.

Guest • August 5th, 2008 at 5:39 pm

@ Guest: “Covered bonds may prove to be a success with investors. But, careful what you wish for. The more banks sell, the more we’re all on the hook, if the loans go bad. Covered bonds issued by "too big to fail" banks are basically equivalent to mortgage backed securities guaranteed by Fannie and Freddie. It’s just another way of putting private-sector bells and whistles on a public sector assumption of risk.”These are end times for the financials. These banks, banker investors, and GSEs aren’t too big to fail because the United States Treasury is simply too small to save then. The Fed cartel’s Board of Governors can’t back up the stock market with value simply by shaking an interest rate at it or pushing paper. The NASDAQ went up on air news, not because all of a sudden its companies were making more profits. And when the air fizzles out, it will come back down because you don’t build up a company on air.There’s nothing much you and I can do about those Fed “governors,” but the economy can. Else tell me how the Fed governors can make real value out of nothing? If the Fed governors can make companies produce more value now, force companies to pay higher wages, make people spend more money, attach greater value to manufactured products, then, yes, they’ll be able to build a solid foundation under NASDAQ and the markets. Since they can’t, they’re talking air.

Gloomy • August 5th, 2008 at 5:44 pm

@MA, Alessandro, and anyone else who cares to commentI’m thinking that there may be a sweet spot coming up to buy gold. Prices are falling as commodity inflation expectations are decreasing. IMO the next leg up for gold will be not to use it as a hedge against inflation, but to use it as a hedge against a currency collapse. I’m thinking that a price in the mid 700 dollar range might be good for loading up. Any thoughts

Alessandro • August 5th, 2008 at 6:05 pm

@GloomyI’ve read recently one legendary investor (don’t remember the name, starts with G) that have bought gold for the first time, he hates gold, but feel desperate enough anout the financial system. Same story with Steve Waldman, who said he is preparing for a financial meltdown.What I get from the anecdotal evidence is that sophisticated investors are starting to buy gold as a hedge against a financial meltdown (and possibly a dollar collapse). Joe6Pack is wonderfully unaware.Picking tops and bottoms is someone else specialty ;)

Gloomy • August 5th, 2008 at 6:37 pm

@Alessandro Thanks. I feel oddly happy about today’s rally. Usually I find myself mumbling a bit to myself on days like this. But the underlying events (such as the commodities bust) are following such a nice script towards catastrophe that I am getting to the point where it is easy to laugh about the silliness of the market. Do you feel it too?

Average Jane • August 5th, 2008 at 6:46 pm

@ SWK – thank you for the explanation; I understand. And you are most articulate–I enjoy your posts immensely. I’m glad to see a bit of levity here today, BTW–the belly button riff was hilarious. Interestingly, I took the morning off work today to open a new checking account at Wells Fargo. (I’m concerned about the undercapitalization of my credit union.) The bank was unusually busy today. It’s been unusually busy this month according to the personal banker with whom I was dealing, but she didn’t elaborate on the reasons–just that she couldn’t figure it out since it wasn’t the first of the month or the 15th. Not sure what all this means, but passing it along. One of my coworkers told me that her kids’ school is now charging twice what they charged last year for her kids’ after-school activities due to budget cuts and referenda that have been voted down. It’s starting to come home to some of the Middle Class now, folks. Just wait until this winter when heating costs jump. Yike. And I cannot tell you all how incensed I am that we taxpayers are going to bail out these awful people on Wall Street. I continue to believe that we’re in for a huge September or October surprise. No one thought that by authorizing G.W.B. to make war that he’d actually do it–and he has. Just when you think "oh, they couldn’t possibly do THAT," they DO. Paranoid? Perhaps. But I’m battening down the hatches, for sure.

Guest • August 5th, 2008 at 6:49 pm

@GloomyYou may already know of this site, but if not you and all should find it amongst the best as it assembles some of the best breaking news from our favorite authors including the professor. Had trouble sleeping last night after reading the best quotes of July.hlowe

Octavio Richetta • August 5th, 2008 at 7:33 pm

"Pretty strong moves up; must be lots of bulls still out there falling into the value trap. Seems like a no-brainer to short these."It is the other way around. There are too many short bears out there that ignite short covering rallies at the slightest hint of good news.

Guest • August 5th, 2008 at 7:36 pm

i heard some guest said OPEC controls oil Price..what crap.. and Sir, oilfields are depleting, yeah around the worldif youve done a bit of research you wouldve known thathttp://uk.reuters.com/article/oilRpt/idUKL150554620080804UPDATE 2-Russian 7 month oil output fall threatens year planBy Tanya MosolovaMOSCOW, Aug 4 (Reuters) – Russian oil output edged up by 0.1 percent in July versus June, but was still down year-on-year, casting more doubts over the government’s goal to avert the first annual decline in production since 1998.Poor oil output performance in Russia — the world’s second largest oil exporter after Saudi Arabia — has become a concern of the government, which relies heavily on export revenues.It has also been a concern for global oil markets in the past year. Crude prices are close to record highs and the International Energy Agency predicts that supplies will fail to keep up with demand in the long term.Energy Ministry data showed on Monday oil production stood at 41.361 million tonnes (9.78 million barrels per day) in July compared to 39.999 million tonnes (9.77 million bpd) in June.Production was down 1.1 percent versus July 2007, when it stood at 9.89 million bpd. In the first seven months of the year, output was 9.76 million bpd, also down by 1 percent versus the same period of last year.————————————————————————–http://www.dailytimes.com.pk/default.asp?page=2008%5C08%5C03%5Cstory_3-8-2008_pg5_19Indonesia warns oil output to finish in 10 years’ timeJAKARTA: Indonesia’s oil watchdog, BPMIGAS, warned on Friday that the country’s dwindling oil reserves could be exhausted in 10 years’ time if no new reserves are found. Indonesia has struggled to develop its rich energy resources, turning into a net importer of crude oil in recent years. Southeast Asia’s biggest economy said earlier this year that it would quit the Organization of the Petroleum Exporting Countries (OPEC) because as a net oil importer it is not happy with high global crude prices. “The declining rate in production is between 8 to 10 percent per year. That means production will finish in 10 years’ time if we have not found new reserves,” Edi Purwanto, deputy chief of watchdog, BPMIGAS, told reporters.

Guest • August 5th, 2008 at 8:03 pm

This is for Gloomy, aka Sunny Jim:Excerpt from this week’s Alan Abelson column in Barron’s, “Revulsion, Not Denial”…As we entered August, hope vanished that the market would take a breather from its by now customary frenetic action that sees stocks gamely striving to climb one session, only to get a painful pasting the next. It was pretty much the same old, same old in the final trading sessions of July. Sandwiched between down days were back-to-back gains of 266 and 186, but the advance was not only short-lived but also a tad desultory, with the market giving every indication that it would just as soon be lolling on the beach.But neither the hesitant nature of the rise nor the soothing somnolence of the season lowered the volume of chatter on the Street about equities making a bottom. The 400-odd points gained in two sessions at midweek was hailed by bottom-fishers (at least, those who still owned a rod) as a sure sign that from here on it was onward and upward for the market.You have to admire the doughty certainty of those bottom-fishers in refusing to be discouraged by continually coming up with nothing to show for their efforts but old water-logged abandoned tires and for steadfastly ignoring the incontestable evidence that in big, bad bear markets, like this one, vigorous rallies are the rule rather than the exception.There hasn’t been as much talk about bottoms since the can-can was all the rage (which, for you young-uns out there, was eons ago). The surest way to know the market has finally, truly hit a bottom is when everybody becomes convinced it hasn’t, or better yet, never will. At that point, not only will investors shun investing, they’ll also have trouble to keep from barfing at the very mention of “stocks.”Trust us (just this once), revulsion, not denial, will define the end of the bear market.By our reckoning, the late great bull market began in the summer of 1983, when the Dow was 1163.06 and the S&P 500 stood at 159.18. It subsequently suffered an occasional significant setback, but didn’t call it quits until last October, when the Dow topped out at 14,198, a tidy little appreciation of 1,120%, and the S&P 500 peaked at 1576.09, a not exactly shabby appreciation of 891%.Man, what a run!Relax. Even the meanest adherent of reversion to the mean wouldn’t contend that the great bull’s successor, the current bear market, will endure for a quarter of a century and, in the process, wipe out all of those lovely gains. Bear markets, even the real ugly ones, however painful, tend to be quite efficient and take care of business in a relatively short time.But even assuming this present nasty number lasts no more than a year or two longer, it’s slated, we fear, to inflict a heap more damage than the considerable amount we’ve suffered so far. It’s still caveat emptor… EndIf I may add my own opinion: I think Abelson is right about bear markets. But, IMO, this one is different: this one is fraud.

Hubbs • August 5th, 2008 at 8:20 pm

@ GloomyAre you talking about physical possession of gold as opposed to stocks?For the uninitiated buyer of physical gold and silver any suggestions as to how and where?Interesting comment on 8-04-08 http://www.survivalblog.com about Ag and Au, and your comment now about gold/silver as a safety for possible currency collapse as opposed to speculation of a tradeable commodity.PS: I love your unabashed namesake view of things. The only thing that comes close is my old hero Al Bundy, and one of my daughters favs: EEyore

Guest • August 5th, 2008 at 8:53 pm

http://online.wsj.com/article/SB121728651034091275.html?mod=todays_us_opinion ExcerptsFannie Mae’s Political ImmunityWe believe in the right of individuals and businesses to lobby Congress. But with Fan and Fred now explicitly guaranteed by taxpayers, letting them ladle cash all over Washington amounts to using government-guaranteed profits to lobby for continued government protection. Congress sets the rules in favor of Fan and Fred, which then repay the Members with cash from their rigged profit stream. This is the government lobbying itself for more government.And, oh, what a stream of political cash it is. First, there are Fannie and Freddie’s political action committees, which have already distributed roughly $800,000 to U.S. House and Senate Members this election cycle. Nearly half of the Senators have received funds and almost all of the money is directed to incumbents…Then there are the "charitable" foundations. Freddie Mac’s foundation handed out $25 million to political groups, think tanks and other Beltway outfits in 2007 alone, more than any other foundation in the country, according to the Washington Business Journal. Guess which foundation ranked number two? Yep, Fannie Mae’s, which gave out $21 million. The foundations grew thanks to gifts of stock during the companies’ heyday before their accounting scandals and the housing bust. Last year, as political scrutiny increased, Fannie closed down its foundation and now runs its tax-deductible donations through the company itself.FANNIE’S FRIENDS: Partial list of Fannie Mae Foundation Recipients 1980-2007: Harvard University, $5,031,000; Brookings Institution, $3,906,000; Acorn, $797,000; Citizenship Education Fund (Rainbow Coalition/PUSH), $660,000; Center for Policy Alternatives, $635,000; Congressional Black Caucus Foundation, $608,000; Manhattan Institute for Policy Research, $600,000; Center on Budget and Policy Priorities, $400,000; Congressional Hispanic Caucus Institute, $285,000. (Source: wwwfanniemaefoundation.org)

son of the paul • August 5th, 2008 at 9:20 pm

I repeat : no recession in the usa.It is just a matter of money.No inflation. It is just a game of playing with figures.

kilgores • August 5th, 2008 at 9:39 pm

@ Average Jane on 2008-08-05 18:46:19How kind. Thank you for that compliment. It’s wonderful having such a consistently pleasant person around to participate in these conversations. You’re a real a breath of fresh air!SWK

Guest • August 5th, 2008 at 10:02 pm

Karen De Coster not only has the insider’s knowledge of auto industry finance, she puts the auditor’s torch to Wall Street’s grand larceny regarding General Motors. Along with surety soldier, Eric Englund, they reveal the criminality, duplicity, incest and fraud Bankers use to fleece investors day after day.Here are two excerpts from “General Motors and the Intellectual and Moral Bankruptcy of Wall Street” August 5, 2008:On June 25, 2007, Wall Street powerhouse Morgan Stanley put out a “buy” recommendation with respect to General Motors’ common stock. Robert Barry, Morgan Stanley’s star analyst, proclaimed a 52-week target price of $42 per share. Less than five months later, on November 7, 2007, Wall Street analysts were stunned by General Motors’ staggering third-quarter (9/30/07) loss of $39 billion – one of the largest bookkeeping losses in history, which was mostly related to the writedown of deferred tax assets.Fifty-three weeks after Morgan Stanley’s buy recommendation, GM’s stock hit a 54-year low of $9.98 per share – on July 2, 2008, after Merrill Lynch’s recommendation had gone from a “buy” to “underperform” (i.e., sell) on that day. In one sweeping move overnight, Merrill Lynch analyst John Murphy cut his target price on GM by a whopping 75%, reducing the target price from $28 to $7. So how is it that GM suddenly went from respectability to mediocrity – in one analyst’s mind – overnight? In fact, why did it take until July 2008 to concede that GM was on life support?******So, just how savvy are some of Wall Street’s best and brightest analysts? Nine days before GM’s deferred tax asset writedown bombshell, UBS upgraded its rating of GM to a “buy.” On September 13, 2007, Citigroup initiated coverage and issued a buy recommendation. Other Wall Street heavyweights, in 2007, that had weighed in with “upgraded” opinions of GM included Banc of America Securities, Goldman Sachs, J.P. Morgan, Lehman Brothers, and Deutsche Securities. One must heed Graham and Dodd’s words [authors of “Security Analysis”] as to what purpose is behind a securities analyst’s recommendation.But then again, Wall Street analysts long ago abandoned their roles of providing independent expertise, and instead turned to selling their firm’s investment banking services. Mark Reutter writes“Stock analysts have long been fixtures at investment banks that both broker (that is, sell) stocks and bonds to the public and underwrite new security issues for companies. With deregulation of brokerage commissions in 1975, which ended the practice of fixed-rate minimum commissions, investment banks found their brokerage business drying up, undercut by Charles Schwab & Co. and other discount brokerages.“Trading fees plummeted and analyst reports no longer paid for themselves. As a result, the role of the analyst shifted from providing relatively impartial information for brokers and their clients to boosterish tie-ins with corporate clients, such as using the research reports to hype a company’s prospects and promoting initial public offerings (IPOs) on investor ‘road shows.’”http://www.lewrockwell.com/decoster/decoster133.html

son of the paul • August 6th, 2008 at 4:30 am

"$2 Trillion of Debt-Related Losses"No worry, no hurry, be happy.Just to create $4 trillion debt to cover this.This is just a matter of money.

GLOOMY • August 6th, 2008 at 6:30 am

THE ORIGIN OF YESTERDAY’S MONSTER RALLYThe origin of yesterday’s rally was likely short covering by hedge funds, many of which probably were forced to close long commodity positions and needed to raise capital.

bytheway • August 6th, 2008 at 6:32 am

One week after Paulsons Freddie rescue the Eurosystem(EZB and EU Federal Reserve Banks) sold in just one week for 578 Million € Gold.This is much more than normal aggregate.This was against the "Washington Gold Agreement" (WGA II)because the EZB hast finished his gold sellings for this fiscal year.the only article about this is from http://www.welt.de/welt_print/arti2277035/Geheime_Hilfen_fuer_Herrn_P..htmlAny questions about the downturn of Gold?Oh and the newspaper write, the politicians known nothing about this game of Trichet.They have no clue what is goin on.

bytheway • August 6th, 2008 at 6:37 am

Also funny:S&P’s Rating Concerns: “Structured by Cows”Excerpt:In one email, an S&P staffer emailed another that an RMBS deal being rated was “ridiculous” and that “we should not be rating it,” according to the report. They reply came back saying that “we rate every deal,” and that “it could be structured by cows and we would rate it.”The story cites another manager in the company’s CDO ratings group, who wrote that the agencies were creating an “even bigger monster — the CDO market. Let’s hope we are all wealthy and retired by the time this house of cards falters.” The email ended with an emoticon “;O),” relevant because it shows that if any concern was known among S&P’s ratings team at the time, it wasn’t one that was taken seriously.http://www.housingwire.com/2008/08/04/sps-rating-concerns-structured-by-cows/Rating = my a…

randy • August 6th, 2008 at 1:04 pm

just got back from a short vacation visiting colleges with my son. Looks like nothing happening in the markets other than the usual manipulation by the worlds CBs! Look at gold! why did it fall so much! Looks like financials have had their pump for the week too. any good bear news out there? I’m getting a little antsy with my shorts.

Guest • August 16th, 2008 at 9:36 am

Great interview. Getting famous means they will have to start listening to him and may start doing things right more sooner than later. We all know that it is a lot easier to face problems at the start than allowing them to become unsurmountable unless a great price is paid. Thank you for sharing your views.Best wishes.Faithful Reader

Anonymous • November 14th, 2008 at 5:02 am

Standing tough under stars and stripes we can tellThis dream’s in sightYou’ve got to admit itAt this point in time that it’s clearThe future looks brightOn that train all graphite and glitterUndersea by railNinety minutes from New York to ParisWell by seventy-six we’ll be A.O.K.What a beautiful world this will beWhat a glorious time to be freeGet your ticket to that wheel in space while there’s timeThe fix is inYou’ll be a witness to that game of chance in the skyYou know we’ve go to winHere at home we’ll play in the cityPowered by the sunPerfect weather for a streamlined worldThere’ll be spandex jackets one for everyoneWhat a beautiful world this will beWhat a glorious time to be freeOn that train all graphite and glitterUndersea by railNinety minutes from New York to ParisMore leisure for artists everywhereA just machine to make big decisionsProgrammed by fellows with compassion and visionWe’ll be clean when their work is doneWe’ll be eternally free yes and eternally youngWhat a beautiful world this will beWhat a glorious time to be free…..–Donald Fagen

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